00:00A rebound in long-dated treasuries is running out of steam after the U.S. Treasury announced
00:04plans to at least double its planned purchases of 10 to 30 year U.S. debt. The move on to
00:09Scott
00:09Bessett responding to a surge in long-term borrowing costs. Very pleased to be joined
00:13in the studio by our markets live strategist Skylar Montgomery Koenig now. Skylar, this is
00:18quite unusual, isn't it? The last time this happened was Operation Twist, I think?
00:22Yes, I mean Operation Twist was under very, very different circumstances in terms of it was post-GFC.
00:28You had the Fed at the zero lower bound, and they said, well, how do we stimulate the economy
00:34from here if we can't cut policy rates any lower? We'll buy at the long end, so that puts long
00:39-end
00:39yields down, it releases some pressure on the mortgage market, and it's meant to be stimulative.
00:44And right now, we don't need stimulative policy. And I think the other unusual bit of it is this
00:50buyback program in particular is meant to help with market functioning and liquidity concerns.
00:55And there's not really an abundance of those within U.S. Treasuries. Yes, you had the 30-year
00:59auction last week reach for a record high, but there wasn't disorder within it. There was a strong
01:05bit-to-cover ratio. Investors are taking down this debt. They're just requiring a greater risk
01:09compensation to do that. So why then do you think Scott Bessett and the Treasury decided to make this
01:15move now? I mean, it seems very much like they want to put some kind of cap on yields. And
01:19the bias in
01:20the last couple of weeks has very been upwards pressure, and they don't seem to want to pull other
01:25levers, right? So the other lever you could do is either tax hikes, less spending, we're heading into
01:30mid-term elections, and we're talking about more spending still. And so that pressure on yields doesn't
01:35seem like it's going away anytime soon. So it's a signaling message from them that they can defend
01:40that level of yields. Maybe, maybe it's just the rise that they're worried about. But the issue is there's only
01:45so much you can do. You can't just keep coming in with buybacks because it just distorts the market
01:50further in terms of it's not QE technically, right? So if you do more of that long-end buying, you
01:55have
01:56to issue somewhere else, and that's the front end. And the risk is you issue at the front end, and
02:01you're
02:01easing technically from a financial conditions perspective, is that the Fed has to hike. And all
02:06of that debt at the front end becomes much, much more expensive, a lot more quickly, and your deficit
02:11could spiral quite quickly as well. Well, I mean, you mentioned the Fed there. I just want to help me
02:16square the circle of the most interventionist Treasury Secretary we've seen in decades with a
02:21new Fed chair who wants to say far less to the markets. How should we look at that? It seems
02:26like
02:26very, very opposite signals, especially when Warsh has come out and said that they want to hold less
02:31balance sheet. It doesn't technically make the balance sheet bigger, but it's certainly heading in this
02:35kind of more intervention direction that's quite worrying. I think the other tension is that Warsh has said
02:41the bond market's done some of the tightening for the FOMC. If that reverses, maybe you need a more
02:46hawkish Fed to balance that, and maybe it forces them to be stronger in their messaging. And I think
02:52the worry for the dollar in particular is it puts credibility under risk. And if Warsh doesn't respond
02:57hawkishly, does that create even more pressure on the dollar and even more pressure on yields?
03:02I mean, how serious is the credibility challenge to Scott Besson's?
03:06I think it's quite significant, and I think you start to run into comparisons with dollar yen.
03:11Because if you can't defend that level, which I don't see how you can in terms of, yes, we've gone
03:16from 2 billion to 4 billion in buybacks, that can accumulate decently quickly in terms of we have
03:23seven buybacks left, I think, this quarter. So that's 28 billion total. But the US Treasury market
03:27is 30 trillion. Of that, the 10 to 20 year sector is something like 6 trillion. So, you know, there's
03:33not
03:33a lot you can do, I'd say. And it just makes that bond market riskier. So if anything, it probably
03:39goes in
03:39the other direction. And if you have to continually defend it, and you're not able to, it's much of a
03:45worse situation.
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