A Temporary Bid for the Long End

By Matheus Balthar · United States / Global Markets

The Federal Reserve is maintaining a restrictive policy stance while the Treasury expands buybacks in longer-dated securities. This letter separates monetary policy from debt-management operations and examines whether Treasury buybacks can improve market functioning without resolving the structural fiscal imbalance. It also assesses real term premia, energy risks involving Iran, marginal Treasury demand from China and Japan, and the implications for gold and Bitcoin.

Key points

• Treasury buybacks can improve liquidity in older securities and reduce local market distortions, but they do not reduce the fiscal deficit or eliminate the amount of debt investors must ultimately absorb.
• Elevated long-term Treasury yields primarily reflect restrictive expected policy rates, high real yields and a larger term premium associated with duration, fiscal supply and policy uncertainty.
• Milder-than-feared enforcement of Iranian sanctions may reduce near-term crude-price pressure, but impaired Hormuz flows, tight distillate inventories and expensive freight preserve upside inflation risk.
• Durable relief at the long end requires both credible disinflation and a legislated improvement in the medium-term primary balance. Liquidity operations can buy time but cannot substitute for fiscal credibility.

The file

Download the PDF362 KB

U.S. ratesTreasury marketfiscal policyterm premiuminflationenergyChinaJapangoldBitcoin

All researchThe portfolios