- The latest Bitcoin and gold rally is less about the Treasury’s buyback program itself and more about what the move signals about policymakers’ concerns over rising borrowing costs.
- The U.S. Treasury announced Wednesday that it would increase purchases of long-dated government bonds after yields climbed to their highest levels in nearly 20 years. The rise in borrowing costs had become a growing concern for Washington and potentially for crypto markets.
- The measure does not involve creating fresh money and does not qualify as quantitative easing (QE) or yield curve control (YCC), two policies typically associated with large liquidity injections and increased risk-taking.
- Even without either policy, Bitcoin and gold have surged while the U.S. dollar has weakened against major currencies. Bitcoin climbed above $77,000 and was up roughly 23% for the week, its strongest weekly gain since March 2023.
What the Treasury Announced
- Between Sept. 9 and Nov. 4, the Treasury plans to conduct several buyback operations involving at least $4 billion of 10- to 30-year Treasury bonds, doubling the previous $2 billion limit.
- Treasury Secretary Scott Bessent said individual operations could potentially exceed $4 billion.
- The purchases will focus on older, less actively traded bonds that can be difficult to transact without causing significant price movements.
- Importantly, Treasury is not creating new money for the program. The purchases will be financed using existing cash or funds raised through the issuance of short-term Treasury securities.
- Lance Roberts, chief investment strategist at RIA Advisors, compared the strategy with the Federal Reserve’s 2011 Operation Twist, which involved buying longer-term bonds while selling shorter-term debt.
- Operation Twist was designed to reduce long-term borrowing costs by influencing the yield curve without injecting additional money into the financial system. Treasury’s current approach works along similar lines.
Why It Is Different From QE and YCC
- QE occurs when the Federal Reserve creates new bank reserves and uses them to purchase bonds or other assets, adding liquidity to the financial system.
- YCC, meanwhile, involves a central bank establishing a target or ceiling for a specific bond yield and buying enough securities to keep that rate under control.
- The U.S. previously employed a form of YCC between 1942 and 1951, while the Bank of Japan used an explicit YCC framework from 2016 to 2024.
- Both QE and YCC can significantly loosen financial conditions. Treasury’s latest move is instead focused on managing liquidity and supporting the long-term bond market.
The Market Signal Is the Bigger Story
- The Treasury’s purchases are relatively small compared with the size of the overall bond market and the government’s ongoing debt issuance. As a result, investors may be paying more attention to what the intervention says about policymakers’ concerns.
- The move suggests officials are seeking ways to contain borrowing costs without directly addressing the government’s widening fiscal deficit.
- That leaves open the possibility that long-term yields could resume their climb. The 30-year Treasury yield fell from 5.30% to 5.18% after Wednesday’s announcement but later rebounded to around 5.25%.
- ING analysts said the buybacks are unlikely to significantly alter the longer-term trajectory of long-duration yields because the purchases are relatively small compared with new debt supply.
- The timing also matters. Treasury announced the move while long-term yields were near their highest levels since 2007, highlighting growing official concern over elevated borrowing costs.
- Bessent said Treasury has a range of tools available and indicated that the intervention was partly intended to signal that officials believe current yields do not accurately reflect economic fundamentals.
- Saxo Bank’s Ole Hansen said the announcement shows Treasury is becoming increasingly attentive to liquidity conditions and rising long-term rates.
- If yields continue to move higher, policymakers could eventually consider stronger measures, including formal YCC. Under such a policy, the Federal Reserve could commit to purchasing whatever amount of bonds is necessary to keep a 10-year or 30-year yield below a set level.
- A move of that scale could sharply expand the Fed’s balance sheet and inject significant liquidity into financial markets.
- Allianz adviser Mohamed El-Erian said the immediate reaction pushed long-term yields lower but suggested the bigger issue was whether the Treasury move could eventually lead to wider adoption of YCC.
- Deutsche Bank described the Treasury’s action as a softer version of financial repression.
- Financial repression generally refers to policies designed to keep government borrowing costs artificially low, allowing inflation to gradually reduce the real burden of debt and potentially erode the value of savings.
- That backdrop can favor hard assets such as Bitcoin and gold, as investors seek protection from currency weakness and declining real returns.
- The Treasury announcement is only one piece of Bitcoin’s latest rally. A rapid unwinding of short positions and the resulting forced buying have also helped accelerate the cryptocurrency’s advance.
