‘The Bond’s Shadow’ argued the Treasury was capping the long end, and that the pressure would fall on the dollar. Instead, the bond took it.
The Treasury bought at its price, not the market’s. It ran two enlarged long-end buybacks in September, each capped at $6bn. Dealers offered ~$10.5bn both times. The Treasury took $5.2bn and $4.1bn, less than half each time. Even the US Treasury will not overpay for US Treasuries. Total buyback capacity held at $38bn a quarter. The long end got a bigger share. Bessent on August 31: “I don’t think I can change the equilibrium price.” The 10-year rose from ~4.73% to 5.29% on September 29, the highest since 2007. The 30-year cleared 5.6%, the highest since 2002.
The Federal Reserve (Fed) hiked under a chair Trump nominated to cut. On September 16, the Fed raised rates 25 basis points (bps) to a range of 3.75% to 4.00%, 12 to 0, its first hike since July 2023. Governor Barr states more are likely, and futures price another on October 28. We deem that unlikely. Oil fell 4.8% on September 29 on talks to reopen Hormuz. Again. Consumer confidence fell to its lowest since 2014, lower than at any point in 2020. The cap on the Fed’s Foreign and International Monetary Authorities (FIMA) repo facility, which Bessent asked the Fed to raise, remains unchanged at $60bn.
The dollar rose. The dollar index (DXY) went from ~99.6 to ~101.4. The Bank of Japan (BoJ) hiked to 1.25% on September 18, as Washington asked, yet the yen still weakened, to ~157.3 per dollar. The Fed still pays ~2.75 percentage points more than Japan. Investors borrow yen and hold dollars to collect the gap. This is a carry trade. The income is paid today. The fiscal risk tied to the dollar has no date. Therefore, markets collect the income now.
A necessary correction for the record. We stated Japan’s July intervention was funded through FIMA, relying on reports of Bessent’s August 2 post on X. The Fed’s balance sheet shows no FIMA borrowing on any Wednesday from July to September. Tokyo spent ~¥15.4tn between July 30 and August 26 from its own reserves.
What we have not seen yet. A fiscal problem shows when long yields rise and the dollar falls on the same day, as sterling and gilts did in September 2022. September 29 was the opposite: the 30-year at a 2002 high, the dollar index up 0.18%. That pattern needs the Fed to stop hiking. While it hikes, the widening rate gap keeps buyers in the dollar. When the hikes stop, the dollar test begins. Barr wants more hikes. We do not expect them. One of us will be wrong on October 28.