1 week ago
Dollar Rebounds as Markets Challenge Treasury Bond Buyback Plan
The U.S. Treasury said it would buy back more long-term government bonds.
It hoped this would calm the bond market and keep borrowing costs from rising too much.
Some investors instead worried that the plan showed concern about the government’s large deficit.
They thought the dollar could lose value, so some bought gold and bitcoin instead.
The dollar later recovered slightly as traders questioned whether the plan would work.
Treasury Secretary Scott Bessent said more bond buybacks could follow.
Federal Reserve meeting notes showed that several officials were worried about inflation and supported raising interest rates.
Investors are now watching Federal Reserve Chairman Kevin Warsh for clues about future policy.
Markets put the chance of a rate increase at 35% in September and 67% in December.
The U.S. dollar recovered modestly after the Treasury announced larger buybacks of long-term debt.
The Treasury plans to repurchase at least $4 billion of 10- to 30-year bonds per operation.
Investors feared fiscal-deficit concerns would weaken the dollar rather than push long-term yields higher.
Gold and bitcoin rose as alternative stores of value in what traders call the “debasement trade.”
Federal Reserve minutes showed several officials favored higher rates, while markets priced a 35% chance of a September hike and 67% chance by December.
- Who
- The U.S. Treasury, Treasury Secretary Scott Bessent, currency traders, and Federal Reserve policymakers are central to the story.
- What
- The dollar rebounded after losses triggered by the Treasury’s plan to increase buybacks of 10- to 30-year government bonds.
- Where
- The market reaction took place in U.S. financial markets, with trading reported from New York.
- When
- The buyback announcement was made Wednesday, and the dollar rebounded during Thursday trading; Fed minutes were also released Wednesday.
- Why
- Investors debated whether the buybacks would stabilize long-term Treasury yields or instead increase concerns about the U.S. fiscal deficit, inflation, and policy credibility.
Treasury rationale
Market concerns
Effectiveness of bond buybacks
Treasury rationale
Treasury Secretary Scott Bessent said yields did not reflect underlying fundamentals and indicated that the government could increase repurchase volumes again.
Market concerns
Some market participants said yields continued rising and viewed the announcement as insufficiently credible or as the market resisting the Treasury’s effort.
Where fiscal pressure should appear
Treasury rationale
The Treasury’s approach seeks to prevent longer-term bond yields from bearing the full impact of concerns about fiscal policy and market conditions.
Market concerns
Investors and strategists warned that if bond markets do not absorb those concerns through higher yields, the pressure could instead appear as a weaker dollar.
Interest-rate response to inflation
Treasury rationale
Several Federal Reserve officials favored raising rates, and many said a hike could be needed if inflation does not move toward the 2% target.
Market concerns
Markets have not fully committed to an immediate increase, pricing only a 35% chance of a September hike, though the probability rises to 67% for December.
Key facts
- Dollar index
- Rose 0.06% to 98.89.
- Treasury buybacks
- At least $4 billion of 10- to 30-year debt per operation.
- Euro
- Fell 0.01% to $1.1676 after earlier reaching $1.171.
- Japanese yen
- Weakened 0.6% to 159.12 per dollar.
- September rate-hike probability
- Markets priced a 35% chance.
- December rate-hike probability
- Markets priced a 67% chance.
- Federal Reserve inflation target
- 2%.
Quotes
Shaun Osborne
Chief FX strategist at Scotiabank
“"It looked odd from a timing point of view at least," said Shaun Osborne, chief FX strategist at Scotiabank. "Markets are concluding correctly that if the Treasury doesn't want the bond markets to take the strain from these concerns about fiscal policy sustainability and Fed policy credibility, then the dollar will have to."”
livemint.com
“"This is (Treasury Secretary Scott) Bessent testing the market and the market fighting back," Ying said. "It could very well be that we get a little bit more of these announcements in the future, but it doesn't seem like they are very credible to the market, at least as of right now."”
livemint.com
Scott Bessent
U.S. Treasury Secretary
“"Yields don't reflect the underlying fundamentals."”
livemint.com
Sources
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