US – Treasury support for treasuries
Last week, the US Treasury stepped in to support the long end of the curve by announcing an increase in buybacks of longer-dated Treasuries. The move followed a roughly 40 basis point sell-off in 30-year yields over July and August and suggests that long-end yields are becoming an increasingly important pressure point for the administration. The move could add at least 66bn USD per year of long-end buyback capacity, equivalent to roughly 15% of the 450bn long end Treasuries issuance. The initial market reaction was positive, with long-end yields rallying by around 10bp, although part of the move was reversed over the following 24 hours. Though, the Treasury’s available toolkit remains relatively small compared with the size of the fiscal deficit and the depth of the Treasury market. The broader challenge remains one of supply absorption. With the US budget deficit projected at close to 2tn USD and net coupon issuance around 1.2tn USD, the market is being asked to absorb a very large volume of duration. This comes at the same time as hyperscalers and other corporates are also significantly increasing bond issuance.
Jackson Hole – Waiting for clarity
This Friday, Kevin Warsh is set to deliver his speech at the Jackson Hole Symposium. The Fed Chair is expected to provide a meaningful update on how the Fed intends to tackle the inflation problem, particularly after the mixed messaging at the July press conference. So far, the Fed has avoided providing clear forward guidance, leaving its reaction function unusually uncertain. This uncertainty is contributing to a steeper US Treasury curve, with long-end yields acting as the main release valve. That runs somewhat against what Bessent has been trying to achieve through lower long-term yields and may point to less coordination between the Fed and the Treasury than some market participants had expected. The key question for Jackson Hole is therefore whether Warsh can provide greater clarity on the Fed’s inflation strategy without locking the Committee into a specific policy path.
Algebris Investments’ Global Credit Team
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