U.S. Treasury Yields Fall, Dollar Rises

The U.S. Treasury Department announced a surprise doubling of longer-dated bond buybacks to at least $4 billion per operation, helping drive down 30-year Treasury yields from multi-year highs amid soaring federal debt reaching $40 trillion.

Longer-term U.S. Treasury yields dropped sharply after the Treasury Department revealed it would significantly expand its government debt repurchases by at least double in an unexpected policy shift. The announcement abruptly altered the tentative buyback schedule Treasury released just two weeks ago, an unusual shift. The change will take effect Sept. 9, the agency said. Treasury Secretary Scott Bessent said buybacks of 10- to 30-year securities would rise from $2 billion to at least $4 billion per operation.

The intervention comes as the federal government grapples with mounting fiscal pressures. Outstanding public debt had reached $40 trillion for the first time. The Treasury Department auctioned 20-year debt at the second-highest yield.

Yield Retreats Following Treasury Liquidity Operations

Before the Treasury’s announcement, the 30-year Treasury yield hit its highest level since 2007 last Thursday—serving only to compound the already soaring interest costs the federal government pays on the massive national debt. The 30-year Treasury yield surged above 5.3%, its highest level since 2007, as investors worried about fiscal deficits, inflation and major borrowing needs tied to artificial intelligence investment. Barclays analysts said in a research note that the forces pushing government bond yields higher are still not exhausted. The 10-year Treasury yield is essentially the market’s estimate of the average federal funds rate over the next 10 years plus term premium, they say. Investors have shifted significantly their thinking from 12 months ago, when the market expected policy rates to be much lower by now, they say, noting that economic growth has proven resilient. Pimco’s Marc Seidner and Pramol Dhawan say global bonds are enjoying a small rebound but remain vulnerable. Rising sovereign debt loads, a surge in AI-related corporate bond issuance, and lingering inflation anxiety tied to energy costs—and what that means for central bank policy—all play a role.

Following the policy change, long-term yields retreated rapidly. The yield on the 30-year Treasury bond plunged from 5.26% to as low as 5.18%, and later fell by around 9 basis points to near 5.20% (and down from its 19-year high of 5.337% to 5.211%). The 10-year yield, which has a heavy hand in steering consumer borrowing rates, dropped from 4.68% to as low as 4.63%. The U.S. Treasury said it would at least double the maximum size of liquidity-support buybacks for longer-dated nominal coupon securities, covering the 10-year to 20-year and 20-year to 30-year Treasury sectors, which will each have a buyback ceiling of at least $4 billion, up from $2 billion. The change will take effect September 9.

U.S. stocks moved higher after the Treasury Department announced an expansion of long-dated government bond buybacks, helping ease pressure on Treasury yields. The S&P 500 closed higher by 0.2%, and the Nasdaq Composite ended up just 0.16%.

U.S. Dollar Index Slump and Global Currency Reactions

The sharp contraction in U.S. yields weighed on the greenback. The U.S. Dollar Index (DXY) trades near 99. The softer U.S. dollar backdrop has driven the euro higher.

U.S. Treasury Yields Fall, Dollar Rises — Photo: Eurasiabusinessnews

For the European Central Bank, expectations are firmer. A Reuters survey showed the majority of respondents expected the ECB to lift its deposit rate to 2.50% next, after inflation in July hit 2.9%. ECB policymaker Olli Rehn said, however, at his Wednesday meeting that wage growth is still low, and there aren’t yet any clear signs of second-round inflation, suggesting policymakers will keep the more relaxed approach to honing policy in contrast to an aggressive rate hiking cycle. Sterling’s fundamentals are more mixed, with UK inflation rising to a four-month high of 2.9% in July, matching expectations.