The U.S. Treasury's surprise bond buyback plans briefly stemmed a global rise in long-term borrowing costs, but lingering concerns about inflation and expanding government debt sent longer-dated Treasury yields higher again on Thursday, while the dollar edged up.
The Treasury responded on Wednesday to U.S. long-bond yields hitting the highest level since 2007 by doubling long-end buybacks to at least $4 billion per operation.
Though the amount is negligible in a market worth $32 trillion, analysts said the move showed the administration's sensitivity to rising long-term rates and inclination to intervene in markets. Elevated borrowing costs have been driving mortgage rates higher and commanding front-page attention.
Investors also said the decision raised questions as to whether the Federal Reserve or the Treasury is now the bigger influence on general credit conditions. It comes on the heels of the U.S. Treasury buying yen in currency markets just weeks ago.
STEPS TO CONTROL THE LONG END
"Any intervention typically doesn't work that well in the long term. After a while, the yields tend to just return to levels that had been in place before," said Michael Goosay, chief investment officer of fixed income at Principal Asset Management.
He said the Treasury has other options, but they are unlikely to alter much. "The reality is borrowing needs require broad curve coverage, and so this kind of change is unlikely to have a meaningful effect" on long bond yields, he said.
The U.S. 30-year yield fell nine basis points overnight but rose again on Thursday. It was last up 5.4 bps at 5.249%, edging back towards Tuesday's 19-year high of 5.34%.
In the currency market, the dollar partly recovered from Wednesday's lows, with the dollar index last at 98.832 .
JPMorgan analysts said in a note that the Treasury's announcement does little to address the underlying issues pushing bonds higher, which they said include unsustainable fiscal deficits and rising inflation expectations.
The U.S. dollar dropped almost 1% on Wednesday in its biggest one-day fall since March and was up slightly on Thursday after the Treasury's announcement knocked U.S. yields, a major driver of the currency.
Long-end yields in Japan fell sharply, though the impact in Europe was less pronounced, with Germany's 30-year yield down only slightly from Wednesday's 15-year high.
The U.S. 10-year Treasury yield rose 5.3 bps on Thursday to 4.71%, eroding some of Wednesday's 5-bps fall.
"It gives, at the margin, a bit more comfort that long bonds aren't going to have a disorderly selloff," ING's Global Head of Markets Chris Turner said of the announcement. "That overall is going to help the investment environment, switching back to a risk-on, slightly dollar-off environment."
GLOBAL SELLOFF
Worldwide long-term borrowing costs have hit multidecade highs as governments pile on record debt amid successive crises from the pandemic to the Iran war, and to fund welfare as populations age and also to boost defence spending.
Rising long-term borrowing costs inflate government interest bills and reverberate across financial markets, where they serve as a benchmark for everything from corporate bonds to equities and real estate.
In Japan, surging yields have lifted borrowing costs to three-decade highs, pressuring government finances and the cost of paying for an ambitious spend-to-grow agenda.
Analysts said those underlying imbalances would continue to weigh on the market.
"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.
"The only conclusion we can draw is that yields reached a level that they don't like, and I think that suggests a willingness to try and control or intervene against natural supply and demand."
