US Treasury Secretary Bessent believes that long yields have lost touch with economic fundamentals and has sanctioned a doubling of the purchase size allowed in the Treasury’s buyback programme for long-dated bonds. We disagree that market have lost touch with reality. We are sanguine about higher yields (even if good news may now become bad news for stocks), though diversification possibilities may shrink.
In a strange move reminiscent of the Fed’s Operation Twist (both the 1961 original and the 2011 version), the US treasury has announced a doubling of the purchase size (to US$4bn) in its buyback programme of longer dated securities (10-30-year maturities). The desire seems to be to reduce those long-term yields. Why? Well, it is noticeable that mortgage yields have risen a lot in recent years, which could explain the weakness of the US housing market. Also, the term premium on a 10-year zero coupon bond has increased by around 25 basis points so far this year (according to calculations by the Board of Governors of the Federal Reserve System), while a recent auction of 30-year treasuries attracted yields of up to 5.22% (the highest since August 2001). Presumably, the long maturity buybacks are to be financed by the issuance of more short-term debt, which could push up those yields (hence the comparison with Operation Twist).
