TS Lombard said the U.S. Treasury’s move to buy back ultra-long government bonds "sounds a lot like" yield curve control, arguing that efforts to hold yields down by intervention could weaken the U.S. dollar. In a report, chief economist Freya Beamish said the United States is running procyclical fiscal policy and, in her view, interest rates should be rising, a setup that would normally support the dollar. She said long-term bond investors want compensation, while the Treasury is intervening to suppress yields and further shorten debt duration even though the average maturity of debt is already relatively short. Beamish said the main question is how markets ultimately push back: by keeping pressure on long-end yields and forcing the Federal Reserve to act sooner than currently expected, or by selling the dollar instead. She added that the Fed will eventually raise rates.
TS Lombard said the U.S. Treasury’s buybacks of ultra-long government bonds "sound a lot like" yield curve control, or YCC, and warned that artificially holding yields down would weaken the U.S. dollar.
Treasury intervention and long-end yields
In a report, TS Lombard chief economist Freya Beamish wrote: "The U.S. is running procyclical fiscal policy, when rates should be rising, which would be positive for the dollar. Long-term bond investors want to be compensated, while the Treasury is intervening to push yields down and further shortening duration when the average maturity of debt is already short."
Two ways the market could respond
"This sounds a lot like YCC," she added. "The only question is how the market wins: whether it keeps pressure on long-term yields, forcing the Federal Reserve to be the responsible actor and raise rates earlier than the market currently expects, or whether the dollar gets sold off instead. The Fed will eventually raise rates."
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