The Treasury Department on Wednesday announced that it would double the size of its repurchases from $2 billion to $4 billion per operation for longer-dated nominal securities—the 10-year to 20-year maturity and the 20-year to 30-year maturity spectrum.
The changes will be in effect from Sept. 9 to Nov. 4. The small quantity and short-term nature of the intervention will not alter curve dynamics and rates in any meaningful way.
This move is a response to recent increases in yields at the long end of the curve, especially the 10- and 30-year rates that in part determine home mortgage rates, which stand above 6.7% and had been climbing toward 7%.
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Like the Treasury’s recent intervention to prop up the yen, this move will work in the short term.
But without a shift to fiscal consolidation—higher taxes, slower pace of government spending or outright declines in government spending as happened in the 1990s—the buybacks will prove to be only temporary.
Consider the scale of the buybacks. At $4 billion per operation, the repurchases are tiny compared to the trillions in issuance that occurs each year.
Other than perhaps punishing speculators that have large, short trades of U.S. Treasuries, this move will not change the reasons why market-derived interest rates are moving higher.
We expect traders to continue to push the benchmark 10-year Treasury yield higher within a narrow trading band. Without substantial policy changes, we would expect the upward trend to continue, pushing the 10-year yield now at 4.65% toward its next major hurdle of 4.70%.
Since July 1, 10-year yields have averaged 4.62%, with a standard deviation of 7 basis points. The highest daily value was 4.73% and its lowest was 4.47%.
Late-summer trading is notorious for wild swings and a lack of direction, with most parties focused on other things.
Still, higher 30-year rates have already had a dampening effect on the mortgage market, with the increase in the 10-year expected to hurt car sales and corporate borrowing.
And that, despite the Treasury’s latest intervention, will not change.
