Early Morning Reid Macro Strategy

Key Market Data (Index @ Close // Change) (S&P 500 @ 7708 // +0.21%) (STOXX Europe 600 @ 651 // -0.11%) (iTraxx Crossover @ 250 // -3) (Brent Oil^ @ 91.98 // +0.29%) (10yr Treasury^ @ 4.64 // -5 bp) (10yr Bund @ 3.26 // 0 bp) (Dollar Index^ @ 98.82 // -0.72%) (Further Fed hikes/cuts priced for 2026 @ 22 // -2 bp) (Further ECB hikes/cuts priced for 2026 @ 43 // 0 bp) ^ - Change from previous day's 4:30 GMT to 04:30 GMT

Markets finally recovered again yesterday, with a big rally for long-end Treasuries after the US Treasury Department announced an increase in its buyback operations. The unexpected move dominated the market agenda, with 30yr Treasury yields (-9.2bps) posting their biggest decline since June, to close at 5.19%, with a further move lower overnight to 5.18%. But whilst the measures led to a pullback in long-dated yields, concerns about financial repression also meant that gold prices (+4.18%) had their biggest gain since March, whilst the dollar index (-0.83%) fell to a three-month low. So the announcement had big effects across multiple asset classes.

That announcement from the US Treasury said they were going to increase “by at least double”, the size of their buyback operations for longer-dated Treasuries. So that covers 10-20 year maturities, and 20-30 year ones too, taking the maximum size from $2bn per operation to at least $4bn. They said that would kick in from September 9 and be effective for the rest of this refunding quarter, which goes up to November 4. The news took investors by surprise as well, because it was just two weeks earlier that the Treasury had released their tentative buyback schedule for the upcoming quarter as part of their regular refunding announcement.

Admittedly, the increase in buybacks isn’t a particularly big amount relative to the number of outstanding Treasuries. But it offers a signal that officials are willing to support the long end, not least after the 30yr Treasury yield closed at a post-2007 high of 5.31% on Monday. So that led to a significant flattening of the yield curve yesterday, with the 2s30s slope (-8.5bps) also seeing its biggest daily decline in the last couple of months.

Elsewhere, the announcement also led to a sharp weakening in the US dollar, which fell against every other G10 currency yesterday. Deutsche Bank’s George Saravelos published a note yesterday (link here), in which he argued that the buyback represented a soft-form financial repression policy aimed at containing the long-end of the US yield curve, and this was negative for the dollar. His case is that if the market price of US Treasuries isn’t “allowed” to adjust lower, then the foreign exchange price of Treasuries owned by foreign investors

has to adjust via a weaker dollar. He also points out the parallels with the Fed’s Operation Twist of the early 2010s, back when the FOMC sold short-term securities to purchase longer- dated Treasuries, in order to lower long-term rates.

Speaking of the FOMC, the minutes of the July meeting were also released yesterday. They said that “many participants assessed that policy tightening would likely be necessary if inflation did not decline”. So that confirmed a hawkish bias, but the wording “many” is typically used for a group that is shy of a majority, so it fell short of an imminent hiking signal. As a result, investors dialled back the likelihood of a September rate hike, with market pricing falling from 35% to 32% over the session. And looking further out, the number of hikes priced by December fell -1.5bps on the day to 22bps, its lowest since Warsh’s first FOMC meeting in June, which was unexpectedly hawkish. Overall, that left 2yr yields -0.8bps lower on the day at 4.16%, having been as high as 4.20% just before the minutes’ release. Still, given the US Treasury buyback announcement, the rally was much bigger at the long-end, with 10yr yields down -5.7bps to 4.65%.

As all that was happening, there were few signs that broader inflationary pressures are disappearing either. Indeed, yesterday saw Brent crude oil (+0.66%) post a 4th consecutive gain to close at $91.62/bbl, and overnight there’s been a further +0.37% increase to $91.96/bbl. That comes as…