US 10-year Treasury yield falls after surprise Treasury buyback boost
The US 10-year Treasury yield declines sharply on Wednesday, trading at 4.651% at the time of writing after reaching an intraday high of 4.712%. The move follows a surprise announcement from the United States (US) Department of the Treasury that it will double the size of its liquidity-support buyback operations for longer-dated securities.
The US Treasury says the size of buyback operations for nominal coupon securities in the 10-year to 20-year and 20-year to 30-year sectors will increase from $2 billion to at least $4 billion per operation. The changes will be effective from September 9 through November 4. The announcement follows a sharp increase in long-term borrowing costs, driven in part by concerns over government deficits, inflation and sovereign debt supply.
The reaction is particularly pronounced at the long end of the yield curve. The US 30-year Treasury yield falls sharply after reaching its highest level since 2007 on Tuesday. The decline spills over into the 10-year yield, suggesting investors welcome Washington’s willingness to intervene to ease strains in the bond market.
However, the longer-term impact of the measure remains uncertain. Gennadiy Goldberg, head of US rates strategy at TD Securities, says the decision represents the first of several potential measures the Treasury could take to support the long end of the curve. According to Goldberg, a more permanent solution could involve reducing the size of long-dated bond auctions.
Jeremy Stretch, head of G10 FX strategy at CIBC, also notes that the move shows the US Treasury recognizes the pressures affecting the bond market and is prepared to adjust policy to contain them.
The intervention also contributes to weakness in the US Dollar (USD), as falling yields reduce some of the currency’s interest-rate support. Attention now turns to the Minutes of the latest Federal Open Market Committee (FOMC) meeting, due later on Wednesday. Investors will look for signs that some Federal Reserve (Fed) officials are considering another interest-rate hike after Fed Chair Kevin Warsh refrained from providing clear forward guidance on the path of monetary policy at his latest press conference.
Markets will also monitor Wednesday’s 20-year US Treasury auction. Strong demand could reinforce the decline in yields, while a disappointing auction could quickly revive concerns about investor appetite for long-dated US government debt.
