US bond markets were already adapting to the Fed’s mew communication style, which resulted in higher term premium/steeper curve before the last week’s buyback announcement. The supply glut from corporate bonds will make it worse in Sep. Sep corporate bond volumes historically speaking would be 50% above Aug and >75% higher in 10yr equivalent duration. So, when Treasury Secretary Bessent surprised markets last week by announcing a significant expansion of the US Treasury's buyback program for longer-dated Treasury securities, it was widely interpreted as an effort to relieve pressure at the long end of the curve after a sustained increase in Treasury yields. The Treasury at least doubled the maximum size of buybacks in the 10-20 year and 20–30-year sectors, implying roughly $64bn of additional annual purchases and an effective reduction in long-duration supply equal to about 15% of annual 20- and 30-year issuance. Long end yields initially fell but then ended the week where it was pre buyback announcement. We interpret that pattern as suggesting that investors remain focused on the broader forces influencing long-term rates, including the fiscal outlook, competition for long-duration capital from AI-related corporate issuance, and the increasingly price-sensitive nature of the Treasury investor base. The Treasury may be able to influence duration supply at the margin, but the market's reaction suggests that investors continue to view these structural factors as the dominant drivers of term premia and long-term borrowing costs. Purely from a treasury market liquidity perspective, the buybacks were not needed. Current off-the-runs long end USTs are priced relatively efficiently relative to a fitted curve of uniform liquidity and does not indicate any dysfunction. Similarly, the liquidity preference we can discern from comparing the asset swap spreads of near off-the-runs (the fourth off-the-run in a given sector) versus on-the-runs shows no major dislocations by this measure. Given this backdrop, we believe Treasury is uncomfortable with the rise in long-term yields, as it runs against the Secretary’s stated goal. Also the rise in long-end JGB yields YTD has had a meaningful impact on the slope of the long end of the curve. In fact the latest Treasury International Capital (TIC) flows data show that net buying of U.S. Treasury notes and bonds by foreign private-sector investors fell to $16.6 billion in June, the lowest level since January. The slump in private foreign bond purchases is running in parallel with continued net selling by the official sector, whose net sales hit nearly $10 billion in June. Data on foreign-owned Treasuries held at the New York Federal Reserve suggest an uptick in Treasury sales is occurring as custody holdings are at a 14-year low of $2.6 trillion. Analysts have lowered their outlook for total foreign purchases of Treasuries this year to $450 billion from $500 billion. Given that net inflows from abroad in the first half of the year have totalled only $178 billion, there is some downside risk even to that forecast. Bessent understands most of the move in long-end yields is unrelated to the shift in Fed expectations. He has time & again commented that they do not want prices to adjust (yields to rise) to attract demand. By attempting to hold the price of longer-duration securities from falling, this leaves the Dollar as the remaining release valve to encourage foreign inflows to finance the US’s current account. After a series of supply setbacks and spending surprises, it is sensible for the market to price some discomfort with policy settings that are far below what some Taylor rule specifications would imply via a weaker currency as it implies a high bar for the data to push for a different policy approach. The fact that US continues to run a 6% budget deficit in an economy near full employment speaks for itself. To conclude, current Trump administration does not like higher long yields hence Bessent had to draw a line somewhere. But the cost of this decision will be borne by Dollar which has been seen in last week’s bull run of Gold & Bitcoin. The dollar debasement is truly back and has miles to go in months ahead.
