Long-dated U.S. bond yields and the dollar tumbled on Wednesday after the U.S. Treasury said it would double the amount of planned bond buybacks in the coming months. As a result of the fall in market-based rates and the dollar, U.S. stocks climbed while gold and bitcoin rose sharply.
If you have more time to read, here are a few articles I recommend to help you make sense of what happened in markets today.
Today's Key Market Moves
Today's Talking Points:
I'll buy back
The U.S. Treasury's announcement on Wednesday that it will at least double the size of long-dated bond buybacks for a couple of months had an immediate impact — long bond yields fell as much as 10 basis points, the yield curve flattened, and the dollar tumbled. Zoom out, however, and we can see that the numbers involved are small, the operation is temporary, and it doesn't change the average maturity of outstanding debt. It's not QE, and the long-term impact will likely be minimal.
But the optics are interesting. This is the second time in a few weeks (after co-ordinated yen intervention with Japan) that the Treasury has been forced to act — or be seen to be acting — to cool the rise in U.S. bond yields. The operation ends just days before the midterm elections. Also, it could have been announced as part of the quarterly refunding only two weeks ago, but wasn't. Since then yields and the term premium have spiked significantly. The Warsh Fed wants to be less active in markets. Is the Bessent Treasury going in the opposite direction?
Wait a minute
The minutes suggest the center of gravity on the FOMC is shifting in a more hawkish direction. "Several" members favored raising rates by 25 bps at the meeting, and "many" said borrowing costs will have to rise if inflation doesn't come back to the Fed's 2% target. That was before the July inflation and payrolls data though, which appear to have taken a hike in September off the table. It might still be a close call.
Carried away
One consequence of the dollar's slide following the U.S. Treasury's surprise bond buyback announcement is the uncertainty it suddenly casts around the FX carry trade, especially the Japanese yen and Swiss franc. Short yen positions had already gotten blitzed by the recent U.S.-Japan intervention — the CFTC net short yen position had its biggest one-week pullback on record — and this is likely to encourage more short covering.
The short Swiss franc position isn't quite as extreme, but it's still historically large. The Swiss franc on Wednesday surged nearly 2% against the dollar, its biggest rise since January and among the biggest in recent years. If the U.S., Japan and others are becoming more active in FX and bond markets, what is the obvious carry trade funding currency of choice now?
What could move markets tomorrow?
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