A surprise U.S. Treasury buyback announcement arrested a worldwide rise in long-term borrowing costs on Thursday, though worries about inflation and ballooning government debt kept markets nervous and yields close to multi-decade highs.
A day after the benchmark U.S. long bond yield surged to its highest level since 2007, driving mortgage rates higher and commanding front-page attention, the Treasury responded by doubling long-end buybacks to at least $4 billion per operation.
The amount is negligible in a market worth $32.2 trillion.
But it comes on the heels of the U.S. Treasury buying yen in the currency market and analysts said the signal showed both the administration's sensitivity to rising long-term rates and a potentially unsettling inclination to intervene in markets.
"The announcement brought some immediate relief to borrowing costs," said J.P. Morgan analysts in a note to clients.
"However, as with the recent Japan interventions, the Treasury's actions belie the underlying structural challenges and do nothing to address them," they said.
"Rates are rising owing to unsustainable structural fiscal deficits (and) firming inflation expectations ... the more lasting impact is the potential for higher risk premia reflecting a Treasury Department that is intervening in the market and moving away from its 'regular and predictable' tenet."
The U.S. 30-year yield fell nine basis points to 5.19% overnight and was steady in Tokyo trade on Thursday. Long-end yields in Japan also dropped sharply ahead of what will be a closely-watched 20-year auction.
Moves in Australian and South Korean debt markets were in the same direction but far smaller, as were rallies in bund and French debt futures.
The U.S. Treasury said larger buyback operations were intended to bolster market liquidity.
"What this does is it relieves short-term pressures in the long end," said Peter Cardillo, chief market economist at Spartan Capital Securities in New York.
GLOBAL SELLOFF
Worldwide long-term borrowing costs have hit multi-decade highs as governments pile on record debt to fund expanding welfare and defence spending.
Long-term borrowing costs matter because they inflate government interest bills and reverberate across financial markets, where they serve as a benchmark for pricing everything from corporate bonds to equities and real estate.
German 10- and 30-year borrowing costs hit 15-year highs on Wednesday, before retreating on the U.S. Treasury's buyback news.
Germany's finance ministry told Reuters that Russian aggression was driving up funding needs for massive defence investment. Surging Japanese yields have lifted borrowing costs to three-decade highs, pressuring government finances and the cost of paying for an ambitious spend-to-grow agenda.
U.S. debt, meanwhile, has ripped past $40 trillion, more than doubling since 2017 when Donald Trump was first sworn in as U.S. president, as it borrows to pay for expensive pandemic responses and a long-running tax and spending imbalance.
Analysts said those underlying imbalances would continue to weigh on the market, pushing long-term borrowing costs higher.
"I suppose what's troubling is that I would not describe the increase in U.S. Treasury yields as being a function of or exacerbated by irrational market conditions," said Eric Robertsen, global head of research and chief strategist at Standard Chartered.
"Therefore, the only conclusion we can draw is that yields reached a level that they don't like, and I think that that suggests a willingness to try and control or intervene against natural supply and demand."
