JPMorgan strategists warned that the U.S. Treasury’s effort to lower long-term funding costs through larger bond buybacks could be seen by the market as lacking credibility, which over time may lift term premia and bond yields instead of easing them. The Treasury said Wednesday it would at least double the size of its bond repurchase operations to provide "greater liquidity support," a move aimed at pushing down long-dated Treasury yields. JPMorgan argued that the step does not address the underlying fiscal problem. The bank noted that the U.S. economy is close to full employment while the fiscal deficit remains at 6%. In comments attributed to strategists including Jay Barry, JPMorgan said that without genuine fiscal consolidation, investors may question the policy’s credibility. It added that if the Treasury becomes more opportunistic in debt management and moves further away from its principle of being "regular and predictable," long-term premia and yields could rise. U.S. national debt has already exceeded $40 trillion, making it harder for policymakers to control borrowing costs as the government continues to issue more debt.
JPMorgan strategists warned that the U.S. Treasury’s attempt to unexpectedly push down long-term funding costs could be viewed by markets as lacking credibility, a dynamic that may raise term premia and bond yields over time.
The Treasury said Wednesday it would at least double the scale of its bond buyback operations to provide "greater liquidity support." The move is intended to lower long-term U.S. Treasury yields.
JPMorgan said the measure only treats the symptoms, not the root cause. The bank pointed to a 6% fiscal deficit even as the U.S. economy is close to full employment.
Strategists including Jay Barry wrote: "Without true fiscal consolidation, we worry the market may view this as lacking credibility. If the Treasury becomes more opportunistic in debt management and moves further away from its principle of being 'regular and predictable,' that could lead to higher long-end premia and yields."
U.S. government debt has now exceeded $40 trillion, making it more difficult for policymakers to contain funding costs while the government continues issuing more Treasuries.
A market survey showed that about 60% of respondents believe the U.S. debt situation will continue to deteriorate until it triggers a major crisis. The item was cited by Jin10.
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