(Part 4)
US Treasury buyback
Just to recap before linking back to the announcement from last night, long-term Treasury yields are up big, which is bad for the US because they are already blowing past their budget and have to borrow more to continue functioning and also to repay their ever growing debt interest expenses. So in an attempt to bring down borrowing costs, US Treasury Secretary Scott Bessent announced this announced large buyback operations for Treasuries maturing in 10-30 years. Long-term yields came down instantly after the announcement, which saw long-duration assets (including crypto, small caps, tech) spike upwards and the USD declining sharply.
Where does this leave us?
In case you were wondering, the Treasury really does use real money to buy these long-dated bonds instead of printing its own money (unlike the Fed, the Treasury cant do this). Instead, it finances these buybacks by issuing other shorter-term Treasury securities (aka borrowing short-term to pay off their longer-term debt 🤯). From what I can interpret, with this Treasury buyback operation, the US is targetting where the biggest problem currently lies, in the long-term borrowing space where yields have exceeded the Treasury's tolerance. However this also exposes the US to short-term refinancing risk. Imagine if your housing loan rate that used to be fixed for 20-30 years now need to be repriced even 1-2 years instead. You'd certainly be feeling more anxious hoping that interest rates don't shoot up in the short-term.
While this buyback is still very marginal compared to the size of the entire Treasury market, it does bring up the question if there will be a larger shift towards financing deficits increasingly at the front-end (the Treasury used to issue debt pretty evenly across the maturities). That would effectively increase the volatility of interest expenses for the US. And since borrowing costs would then be more more sensitive to Fed policy (which sets short-term rates), some might also argue that the Fed would become less effective as it would certainly become much more fiscally painful to maintain high interest rate to say, combat high inflation. I guess this is what we get when the Treasury secretary used to be some hedge fund guy who made a living shorting other countries currencies.
TLDR
I barely scratched the surface here, but covered some important background about yesterday's news. Its all interlinked, from Japan to AI to inflation to the wars and Trump. And here in Singapore we are just a tiny boat that's just going along the flow. Not sure if this wave will come crashing down anytime soon but if it does I guess its abit better knowing that you have read about it on some TZ personal finance telegram channel 😭