GGMA Markets Briefing: US Treasury’s efforts to rein in the rise in long-term bonds remain the dominant theme in markets
The US Treasury’s efforts to rein in the rise in long-term bonds remain the dominant theme in markets. Bloomberg reports that investors are buying hedges against a long-term decline in the dollar, and they are buying them in two markets at once. A strategist put both trades in the same sentence, calling the revival in cryptocurrencies a signal of the same concern behind gold's buoyant month (BBG).
The common cause is a Treasury that has begun intervening in its own bond market while the deficit path is unchanged. A European bank's head of currency research describes the buybacks, together with the encouragement of a Federal Reserve facility that let Tokyo borrow dollars against its Treasury holdings rather than sell them, as soft-form financial repression aimed at containing the long end. His point is the one that matters for every other market: if the price of Treasuries is not allowed to adjust downwards, the adjustment has to happen somewhere, and where it happens is the dollar (Yahoo).
A CNBC report suggested the Treasury might tap its cash pile to fund buybacks of higher-yielding older securities, and Treasuries were supported through the US session on it (BBG) (BBG). In a press conference on Monday, the Treasury Secretary then stopped short of any further signal on debt management, saying the department would continue with its regular programme and that no changes would come before the November refunding, and when asked whether he would increase the buybacks, he said the United States had not bought a single bond yet (BBG). The announced expansion at least doubles liquidity-support operations in 10- to 30-year debt from 9 September, with the published calendar to early November indicating up to 14 billion dollars, against a deficit the Congressional Budget Office puts at 2.1 trillion this fiscal year, some 200 billion worse than last (BBG) (BBG). One senior economist called amounts on that scale normal cash-flow variations for the Treasury (BBG). The fiscal repair meant to follow is not obviously coming either: Republican leaders dropped several hundred billion of spending cuts earlier this summer, the House has passed an unfunded 95 billion dollar war measure, and one Republican senator said plainly that deficits are not a winning election issue even though acting on them is right (BBG).
Strategists at two large American banks said the buybacks are unlikely to bring long rates down, one arguing the plan does not address the actual sources of long-end volatility and would not reset rate levels even if scaled up, the other that another catalyst would be needed, such as slower growth and inflation, less uncertainty about Fed policy, fiscal consolidation, or lighter corporate issuance (BBG). Three further houses expect the curve to keep steepening, the opposite of what the Treasury was trying to achieve (BBG). However, one American bank sees better asymmetric risk and reward at the long end now that a Treasury put exists, and argues the story of an unanchored back end is overplayed (BBG). The Secretary's own early mentor was blunter, writing in a newspaper column that governments defending prices against fundamentals always lose, that the long-term Treasury yield is the only fiscal disciplinarian the country has left, and that the bond market had not been acting as a vigilante but as a pushover that had finally begun to clear its throat (BBG).
Regarding central banks, the Bank of Japan's own gauge of underlying inflation stayed above target, rising 2.3% in July on the 2025 base against the 1.8% government core measure published last week (LS). The measure strips out fresh food and the effects of government fuel and utility support, and was introduced this March precisely to see through those distortions. It lends weight to the Bank's argument that it must stay vigilant on upside risks, and a former board member argues the Bank is now boxed in: with a hike almost fully priced, holding would risk sending the yen sharply lower again, and the Treasury Secretary's public hope that Tokyo moves makes it harder for a pro-stimulus government to object (BBG). He expects a follow-up as early as January and a cycle running beyond the 1.25% to 1.5% once thought terminal, against a median economist forecast of 1.5% (BBG). Economists surveyed this month lifted their forecast for core inflation in the first quarter of 2027 to 3% from 2.8% (LS). The Reserve Bank of Australia's August minutes showed a board that discussed the case to raise at length before judging the current setting was doing its work, with several members saying it was quite possible the upside risks to the inflation forecast would crystallize and require tightening (Reuters). Australian money markets price 3 basis points for September, an 11% probability, and 15 basis points cumulatively by December. Monthly inflation data due on Wednesday is expected to show the core measure edging down (Reuters).
Friday's Fed Chair Warsh’s speech carries more than its usual weight, because the chairman has come close to endorsing the very rise in yields the Treasury is trying to reverse, saying in July that markets had done quite a bit of the work and would go on responding as they saw fit (BBG). The backdrop is structural rather than cyclical: what was once described as a global savings glut has become a savings squeeze, with government debt, fractured supply lines, the cost of ageing and the artificial-intelligence build-out all competing for the same pool of capital (Reuters). American inflation has now run above the 2% target for more than five years, and the July minutes record colleagues worried both that delay would mean steeper increases later and that the longer the overshoot persists the more the public doubts the commitment (Reuters). Two houses warn the risk on Friday may be a hawkish message reaffirming that commitment and keeping further tightening on the table, and anyone hoping for a return of traditional forward guidance is likely to be disappointed (BBG). Senate Democrats have separately asked the chairman to detail his communications with the President (Reuters).
Currently, STIR traders price 11 basis points of tightening for the September Fed meeting, a 43% probability of a rate rise, and 28 basis points cumulatively by December. For the ECB, they price 23 basis points for September, a 92% probability, and 43 basis points cumulatively by December. For the BoJ, they price 20 basis points for September, an 81% probability, and 40 basis points cumulatively by December.
In stocks, futures for the tech-heavy Nasdaq gauge rose 0.42% to 29,229 after the underlying index fell almost a per cent on Monday in a semiconductor selloff that took a gauge of chip stocks to its lowest since July (BBG). The bellwether chipmaker posted its longest losing streak since 2022 as investors pared holdings ahead of Wednesday's earnings (BBG). The credit market is watching the same trade from underneath: five-year default protection on one large chip designer rose 28 basis points this month, more than on two comparable technology borrowers, as it backstops financing packages for the build-out, and a strategist warned of a growing layer of phantom leverage beneath the sector as leases, purchase commitments and residual-value guarantees stretch into the trillions (BBG). The S&P 500 contract added 0.14%. In Asia, the ASX led with a 0.74% gain to 9,109 after the Reserve Bank minutes, the Nikkei rose 0.55% to 65,800 and the regional emerging-market gauge added 0.60% to 1,699 after erasing an early decline (BBG). European shares were set to open firmer, the Euro Stoxx 50 up 0.25% at 6,482.
In currencies, the dollar held Monday's gains, the index up 0.07% at 99.08. It had firmed after the Treasury Secretary said the United States would cut Iran off from the global financial system (BBG) (BBG). The yen was little changed at 159.32, still close to the level that drew coordinated intervention last month despite a policy path the market now prices heavily (LS). The Canadian dollar was steady at 1.386.
In Canada, the 50% American tariffs took effect on Saturday across hundreds of items including furniture, plastics, plywood and electrical equipment, imposed under never-before-used provisions of a 1930 statute that overrides the trade agreement signed in the President's first term (BBG). A University of Calgary economist estimates that 90,000 jobs, roughly four-tenths of a per cent of the labour force, could be lost if they persist, and one Canadian bank's economist put the growth cost at two-tenths this year and three-tenths next (BBG). Ottawa's answer is already dated: counter-tariffs on 20 billion dollars of American steel, dairy, appliances and electronics from 8 September, matching the American measure almost exactly, with the prime minister saying the country was attacked rather than the aggressor (BBG). That date matters, because it leaves a fortnight in which talks could restart, and the government privately sees little chance of that before the November midterms (BBG). By Monday the tone had shifted slightly, the prime minister conceding that matching the larger economy dollar for dollar is difficult, and a more targeted route may follow, though everything remains on the table (Ndtvprofit). Ministers set out the domestic half today at 11:00 Ottawa time, expanded jobless benefits and business loans on the pandemic model (Ndtvprofit). The Bank of Canada faces a bind: American tariffs weaken growth, while retaliation raises prices at home (BBG).
In commodities, Bitcoin traded above eighty thousand dollars for the first time since mid-May, up 2.29% to 80,737, and the weekly move is the striking one: a 23% gain in the seven days to Sunday, the biggest in about three years, forced the liquidation of billions in leveraged positions (Thehindubusinessline). It remains well below the peak it set in October (Thehindubusinessline). Gold consolidated after a four-day run, slipping 0.26% to 4,640, having touched its highest since May, and the participation is broadening: bullion-backed funds added more than 28 tons last week, the most since January, while one American bank lifted its three-month target and cautioned that physical demand needs to catch up for the rally to continue (BBG). Brent was little changed at 92.10 at the time of writing, after the Treasury Secretary threatened economic punishment for countries doing business with Iran, naming more than sixty entities and five lifelines including gold, shipping and digital assets, and promising to sanction a major financial institution by the end of this week (BBG). Whether any of it binds depends on China, which buys the bulk of Iranian crude: asked why the punishment was not immediate, the Secretary said he had no wish to blow up the global financial system, and a former diplomat noted this was the warning of a landing rather than the landing itself (BBG) (BBG). Copper eased 0.28% to 510.49.
Data and the day ahead: German second-quarter growth was revised up to 0.3% on the quarter and 1.0% on the year, both a tenth better than expected, but the composition was poor. Private consumption rose 0.1% against 0.2% expected, capital investment fell 0.2% where growth was forecast, and government spending added just 0.1% against 0.9%, so the fiscal impulse all but stopped. Norwegian unemployment held at 4.5% on a revised prior. Earlier, the Reserve Bank of Australia released the minutes of its 10-11 August meeting at 03:30 CET and its assistant governor spoke at 06:00 CET, Japan's leading index came in at 116.5 for the final June reading against 116.4 and the coincident index at 118.5 from 118.2, and department store sales accelerated sharply in July, the nationwide measure to 5.1% from 2.3% and the Tokyo measure to 9.0% from 4.4%. Australia sold 1.2 billion Australian dollars of 2031 bonds at 4.63%. Still to come: the German business climate index at 10:00 CET, seen rising to 87.2 from 86.6, with Friday's flash surveys having shown manufacturing output at a 55-month high on defence and artificial-intelligence investment even as the composite slipped (LS). The week's two set-piece events are the chipmaker's earnings on Wednesday and the Federal Reserve chairman's Jackson Hole speech on Friday (Reuters).