Summary
- The long end of the curve is rallying after the Treasury announced it will at least double the size of its long-end liquidity support buybacks, from $2bn to at least $4bn per operation, targeting the 10-20y and 20-30y sectors starting September 9.
- The Treasury is buying back long-dated coupons and funding it with bills, which shortens the maturity of debt held by the public. That is the same consolidated-balance-sheet operation as QE, run out of a different building and labeled “liquidity support.” The amounts are small against gross coupon issuance. The signal is not: marginal interest rate policy is now being conducted by the Treasury, and the long end is the target.
- Our stance does not change today, it gets a policy escort. The 10y term premium was already 1 to 1.4 standard deviations rich to our fair value model before the announcement. The macro drivers (growth and inflation leading indicators, unemployment, Fed balance sheet, rates vol) all pointed lower. Treasury has now added an active suppressor to a premium that fundamentals already said should fall.
- The risk remains a vol event (the MOVE index has been suppressed YTD) or our inflation leading indicators stop rolling over.
- Suppressing the term premium while nominal growth runs near 6% socializes inflation risk onto currency holders. That is bullish gold and bitcoin.
What the Treasury announced, and what it actually is
Two weeks after publishing this quarter’s buyback schedule, the Treasury
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