The US Treasury’s decision to increase its purchases of longer-dated government bonds has eased pressure on the long end of the market, but investors continue to face structural concerns around government debt, inflation and the outlook for interest rates.
The Treasury will increase the size of its liquidity-support buyback operations for longer-dated nominal coupon securities from $2bn to at least $4bn per operation between 9 September and 4 November.
The move followed a sharp sell-off in long-dated Treasuries that pushed the 30-year yield to 5.34% earlier this week, its highest level since 2007. The announcement subsequently drove the yield lower, while the 10-year yield also eased.
Susannah Streeter, chief investment strategist at Wealth Club, said the intervention had “calmed bond and equity markets, for now”, but warned that it did not address the underlying pressures facing the Treasury market.
“The Treasury says the move is designed to provide greater liquidity support at the longer end of the market, and that can help dampen volatility and bring borrowing costs down in the short term,” she said.
“But it does not change the fundamental picture of rising government debt, persistent deficits and inflationary pressures.”
David Roberts, head of fixed income at Nedgroup Investments, said the move could have a more significant impact on long-duration bonds than the initial intervention might suggest.
“We’ve been talking about US long bond yields at the highs since 2007,” Roberts said.
He said he had moved short US duration in February, but identified the possibility of the Treasury seeking ways to push long-term yields lower as a key risk to that position.
“Lower long bond yields translate directly into lower mortgage costs,” Roberts said, arguing that cheaper mortgages could give consumers more disposable income and support President Trump’s political position.
Investors rotate from cash into bonds and multi-asset funds
Roberts said the conflict with Iran had damaged Trump’s approval ratings while higher oil prices had made it harder for the Federal Reserve to cut interest rates.
He said Treasury Secretary Scott Bessent had therefore needed to find a way to support the bond market, particularly as higher mortgage rates were putting pressure on the US housing market.
“Today he announced a near doubling of the amount of long maturity bonds his department would buy in their ongoing operations,” Roberts said.
He added that surveys indicated record short positions in US bonds, particularly at the long end, meaning the Treasury announcement could trigger further buying from investors closing those positions.
“Within minutes of the announcement, long bonds had risen significantly, wiping out recent losses,” he said.
Roberts said yields remained close to 20-year highs, leaving scope for further gains in long-duration US bonds.
“Some of those short the market will be forced to buy, but that could dissipate quickly,” he said.
Nedgroup Investments is overweight US bonds with maturities of 10 years and above, Roberts said, although he cautioned that it was too early to determine whether the rally would be sustained.
“To decide whether this rally has legs, I’d suggest watching the stock price of major US home builders,” he said.
“They rally over the coming sessions, and that would suggest the market believes Bessent’s plan to force down market and mortgage rates might just work.”
Roberts added: “With bond yields at current levels, it’s a brave person who is short. If the US Treasury starts to intervene, not only might it be brave, it could prove foolhardy and expensive.”
The Treasury intervention nevertheless provides only temporary support unless underlying concerns over US debt, deficits and inflation begin to ease.
The latest Federal Reserve minutes also showed increasing concern about inflation risks. Several policymakers indicated they were prepared to raise rates if inflation fails to move towards the 2% target, while others highlighted risks to employment and growth.
The conflicting pressures leave the Fed facing a difficult policy choice, with higher energy prices potentially feeding inflation just as the labour market weakens.