US Treasury’s Bond Buyback Plans Offer Temporary Relief, But Concerns Over Debt and Inflation Remain

The US Treasury’s surprise bond buyback plans have provided temporary relief to the global bond market, but lingering concerns over inflation and government debt have pushed longer-dated Treasury yields higher again.

On Wednesday, the US Treasury responded to rising long-term borrowing costs by doubling its long-end buybacks to at least $4 billion per operation. While the amount is negligible in a market worth $32 trillion, analysts believe the move demonstrates the administration’s sensitivity to rising long-term rates and its inclination to intervene in markets.

Elevated borrowing costs have been driving mortgage rates higher and commanding front-page attention. Investors are questioning whether the Federal Reserve or the Treasury is now the bigger influence on general credit conditions, particularly given the recent intervention in currency markets.

According to Michael Goosay, chief investment officer of fixed income at Principal Asset Management, any intervention in the bond market is unlikely to have a lasting impact. ‘Any intervention typically doesn’t work that well in the long term. After a while, the yields tend to just return to levels that had been in place before,’ he said.

The US 30-year yield fell nine basis points overnight but rose again on Thursday, reaching 5.249%, edging back towards Tuesday’s 19-year high of 5.34%. In the currency market, the dollar partly recovered from Wednesday’s lows, with the dollar index last at 98.832.

JPMorgan analysts have noted that the Treasury’s announcement does little to address the underlying issues pushing bonds higher, which include unsustainable fiscal deficits and rising inflation expectations. The US dollar dropped almost 1% on Wednesday in its biggest one-day fall since March, and was up slightly on Thursday after the Treasury’s announcement knocked US yields, a major driver of the currency.

Long-end yields in Japan fell sharply, though the impact in Europe was less pronounced, with Germany’s 30-year yield down only slightly from Wednesday’s 15-year high. The US 10-year Treasury yield rose 5.3 bps on Thursday to 4.71%, eroding some of Wednesday’s 5-bps fall.

Chris Turner, ING’s Global Head of Markets, believes that the announcement provides a bit more comfort that long bonds won’t have a disorderly selloff. ‘That overall is going to help the investment environment, switching back to a risk-on, slightly dollar-off environment,’ he said.

Worldwide long-term borrowing costs have hit multidecade highs as governments pile on record debt amid successive crises from the pandemic to the Iran war, and to fund welfare as populations age and also to boost defense spending. Rising long-term borrowing costs inflate government interest bills and reverberate across financial markets, where they serve as a benchmark for everything from corporate bonds to equities and real estate.

Germany’s Finance Ministry has attributed the rise in borrowing costs to Russian aggression, which has driven up funding needs for massive defense investment. In Japan, surging yields have lifted borrowing costs to three-decade highs, pressuring government finances and the cost of paying for an ambitious spend-to-grow agenda.

U.S. debt has topped $40 trillion, more than doubling since 2017 when Donald Trump was first sworn in as U.S. president, as it borrowed to pay for expensive pandemic responses and a long-running tax and spending imbalance. Analysts believe that those underlying imbalances will continue to weigh on the market.

‘I would not describe the increase in U.S. Treasury yields as being a function of or exacerbated by irrational market conditions,’ said Eric Robertsen, global head of research and chief strategist at Standard Chartered. ‘The only conclusion we can draw is that yields reached a level that they don’t like, and I think that suggests a willingness to try and control or intervene against natural supply and demand.’

Overall, while the US Treasury’s bond buyback plans may have provided temporary relief, the underlying concerns over debt and inflation remain, and the market is likely to continue to be driven by these factors.