US
US long-term Treasury yields have retraced most of yesterday’s drop triggered by the US Treasury’s buyback announcement, while USD has extended its decline. Crude oil prices are higher as markets await details of President Donald Trump’s “economic D-Day” plan for Iran.
The US Treasury unexpectedly announced a doubling of the maximum size of its long-end buybacks to $4bn per operation effective September 9 through November 4, a day after the mid-term election. According to the Treasury “This increase in buyback operation sizes reflects Treasury’s desire to provide greater liquidity support in longer-dated nominal sectors (10-year to 20-year sector and the 20-year to 30-year sector).
The Treasury buyback is essentially a debt-management swap. The Treasury buys and retires older, less liquid bonds (off-the-run) in favor of new, more liquid debt (on-the-run) issued through its regular auction. Total debt stays the same but its composition shifts toward newer, more liquid securities. That effectively reduces the liquidity risk premium and cap yields at the long-end of the curve.
The additional buyback size will probably be financed at the margin through greater bill issuance. More front-end supply combined with long-bond purchases, point to a flatter yield curve. However, the impact should be limited given the small size of the operations relative to the overall Treasury market ($31.4 trillion).
The timing of the Treasury’s buyback announcement sends a less comfortable message. The Treasury expanded the long-end buybacks shortly after the 30-year Treasury yield reached its highest level since 2007. This suggests that heavy debt supply (public and private) is beginning to strain long-end liquidity and the Treasury is increasingly uncomfortable with rising borrowing costs.
The move also creates an awkward policy tension. Fed Chair Kevin Warsh stressed the value of “getting an unfiltered message from markets.” However, the Treasury’s intervention risks blurring the lines between improving market functioning and suppressing borrowing costs to contain fiscal stress.
Bottom line: the perception the Treasury is managing yields rather than liquidity undermines US fiscal credibility and is a drag on USD.
The FOMC minutes of the July 28-29 meeting suggest a high bar for tightening. “Most participants anticipated that inflation would step down over the rest of the year as the effects of tariffs and earlier energy price increases wane.” Meanwhile, “many participants assessed that policy tightening would likely be necessary if inflation did not decline.” However, the latest soft inflation data should ease those concerns and reinforce the case for keeping rates on hold.
Second-tier US economic data is on deck: weekly jobless claims, and August Philadelphia Fed business outlook survey. San Francisco Fed President Mary Daly (2027 voter) and St. Louis Fed President Alberto Musalem (non-voter) speak.
SWEDEN
USD/SEK is consolidating yesterday’s losses triggered by broad USD weakness. As was widely expected, the Riksbank kept the policy rate at 1.75% for a seventh consecutive meeting. The Riksbank stressed again that “the probability of a rate increase later this year remains.”
The swaps curve continues to fully price in a 25bps hike to 2.00% in December. But with inflation in Sweden still well below the 2% target, the Riksbank can afford to stay on the sidelines for longer. That’s a headwind for SEK.
AUSTRALIA
AUD/USD is holding on to yesterday’s gains triggered by broad USD weakness. Australia’s July labor force report was soft. The economy unexpectedly lost -15.8k jobs in July (consensus: +12k) vs. +80.2k in June, driven by lower part-time employment (-32.2k vs. +31.4k in June). Encouragingly, full-time employment rose 16.3k in July and the previous month’s gain was revised 20k higher to +48.9k.
More concerning, the unemployment rate rose 0.1ppt to 4.5% (consensus: 4.4%) despite a lower participation, while hours worked fell -0.6% m/m. This suggests weakness in labor demand rather than an increase in labor supply.
The continued easing in labor market conditions reinforces the case for the RBA to remain on hold for some time. Regardless, Australia’s attractive carry alongside the country’s strategic exposure to commodities linked to energy, AI, and defense remain key AUD tailwinds.
