It’s probably the biggest story of the week. The US Treasury Department plans to double its purchases of long-dated bonds to at least US$4 billion per operation. The move came as a surprise, given the buyback schedule was only published around two weeks ago.
What does this actually mean? The Treasury is effectively buying longer-dated bonds, the 30-year in particular, in an effort to ease upward pressure on long-term interest rates. The US 30-year yield traded as high as 5.33% this week, its highest since June 2007. Market commentary has been blunt, calling it “big talk for little action,” or the equivalent of “bringing a knife to a gun fight.”
The initial announcement drove a sharp move in bond yields:
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US 10-year yield down 6 bps to 4.64% (still stuck in its trading range of the past four weeks)
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US 30-year yield down 10 bps to 5.18% (a sharp pullback, but only a two-week low)
Gold also ripped 4.3% to US$4,522/oz, suggesting the market viewed this as another episode of financial repression (basically more Ds – deficits, devaluation and debt).
The next day, yields V-shaped straight back to pre-announcement levels. The market’s message is clear, it will take a lot more than this to tame the beast.
Against a backdrop of mounting intervention, and with US debt crossing US$40 trillion for the first time, owning real assets looks increasingly like the way to go. It’s also why gold keeps trending higher, even after a massive one-day move.
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