GS MORNING: 1 UST Buybacks, 2 USD Update, 3 FX Trader Call Takeaways and 4 FOMC Minutes Recap

GS MORNING: 1) UST Buybacks, 2) USD Update, 3) FX Trader Call Takeaways and 4) FOMC Minutes Recap

Highlights from GS Research, Sales, and Trading: 1) UST Buybacks, 2) USD Update, 3) FX Trader Call Takeaways and 4) FOMC Minutes Recap

TREASURY TRADING (BROWN): The Treasury announced they will increase long end buybacks by at least $2bn per operation for the remainder of the refunding quarter. It is our expectation that the increased sizes of buybacks will persist into future quarters as well. Given there are 9 operations this quarter, we see this as a minimum increase of $18bn per quarter, or $72bn per year, bringing the total long end buybacks to $144bn per year. The Treasury is issuing $111bn 20y and 30y bonds combined per quarter, or $444bn per year at current auction sizes. The increase is equivalent to a 16% reduction in 20y and 30y supply. Long end buybacks will now repurchase about one-third of all 20y and 30y supply auctioned. The bull flattener makes sense in this context. We think the UST curve will have a difficult time steepening in the near term given the Treasury is showing a strong preference to subdue term premium. We also think this should anchor long end volatility in the near term. However, we do not think that yields need to reprice materially lower. In our view, deficits and ai-related supply will continue to weigh on duration, preventing a deep rally in response to the increase in buybacks.

EQUITIES ONE DELTA TRADING (PRIVOROTSKY): Mechanically this isn’t QE and they still have to fund whatever they buy back. There also isn’t some requirement that every operation is perfectly duration neutral… Treasury manages duration across the whole funding program. But the signal seems pretty clear: they are willing to use buybacks and issuance composition more actively to stabilize the long end. Call it quasi-Twist, Twist-lite, whatever… the label matters less than the reaction function. I actually think the more lasting implication may be for the dollar/gold than rates. Rates can eventually re-clear higher because the underlying supply hasn’t disappeared. But if the market starts believing that sufficiently aggressive long end tightening will be met with larger buybacks, shorter issuance or other liability-management tools, some of that adjustment has to migrate elsewhere. A flatter curve and weaker dollar feels like a pretty logical expression of that. For equities/gold I think that is pretty bullish. The important information yesterday wasn’t whether $4bn itself changes the supply/demand balance… somewhat marginal. It was learning that the response to pressure in the long end can include changing the way Treasury manages duration. That strikes me as more important than the initial move in bonds.

2) G10 FX OPTIONS TRADING (PRANEET SHAH) – Quick Thoughts on USD

News that the Treasury is looking to calm down the backend has seen a broad-based USD sell off. This feels like more of a signal, rather than an effective measure over the medium term since underlying issuance has been the main driver of the repricing higher in yields (which this does not change). Duration may well rally given positioning in the steepener (and short-term reaction to the news). However, this should just act to cap the upside rather than cause material sustained move lower in yields.

I do however think this is more meaningful for the USD. They have shown that they are willing to be imaginative when it comes to supporting the backend, however this may come at the cost of a weaker USD. We can also see