By Rae Wee, Harry Robertson and Gertrude Chavez-Dreyfuss
SINGAPORE/LONDON/NEW YORK, Aug 20 (Reuters) - The U.S. Treasury's surprise bond buyback failed to quell lingering concerns about inflation and expanding
government debt, as bond yields rose on Thursday, dragging the dollar higher as well.
The Treasury responded on Wednesday to U.S. long-bond yields hitting the highest level since 2007 by doubling long-end buybacks to at least $4 billion per operation.
The move, after a sharp selloff in long-duration debt, provided instant relief to a market that has been under pressure from concerns about fiscal debt, inflation and competition from huge AI-related borrowing.
Investors, however, said they wanted the Treasury to take steps that would provide more lasting support — and they worried about the market distortions the move could create.
U.S. Treasury Secretary Scott Bessent said on Thursday he may increase again the volume of Treasury bonds the government will repurchase. Bessent told CNBC his objective was to support liquidity in an area of the market that is thinly traded, especially in August, while having to compete with a lot of corporate issuance at higher yields, including for AI infrastructure.
Luis Alvarado, co-head of global fixed income at Wells Fargo Investment Institute in San Francisco, said the Treasury's move should provide just "short-term relief" because the key drivers pushing yields higher, such as inflation, monetary policy uncertainty and huge fiscal deficits, are still in place.
"So until investors gain greater clarity on those big issues — not the little Band-Aid that was put on today — the risks to long-term trends still remain skewed to the upside."
Though the amount is negligible in a market worth $32 trillion, analysts said the move showed the administration's sensitivity to rising long-term rates and inclination to intervene in markets.
Elevated borrowing costs have been driving mortgage rates higher and commanding front-page attention.
Investors also said the decision raised questions as to whether the Federal Reserve or the Treasury is now the bigger influence on general credit conditions. It comes on the heels of the U.S. Treasury buying yen in currency markets just weeks ago.
STEPS TO CONTROL THE LONG END
"Any intervention typically doesn't work that well in the long term. After a while, the yields tend to just return to levels that had been in place before," said Michael Goosay, chief investment officer of fixed income at Principal Asset Management.
He said the Treasury has other options, but they are unlikely to alter much. "The reality is borrowing needs require broad curve coverage, and so this kind of change is unlikely to have a meaningful effect" on long bond yields, he said.
On Thursday, the benchmark 10-year yield climbed 4.7 basis points to 4.70%, while U.S. 30-year yields advanced 5.5 bps to 5.249%, edging closer to Tuesday's 19-year high of 5.34%.
In Japan, long-end yields fell sharply, though the impact in Europe was less pronounced, with Germany's 30-year yield down only slightly from Wednesday's 15-year high.
In the currency market, the dollar partly recovered from Wednesday's lows, with the dollar index last up slightly at 98.88. It dropped almost 1% on Wednesday after the Treasury announcement, its biggest one-day fall since March.
JPMorgan analysts said in a note that the Treasury's announcement does little to address the underlying issues pushing bonds higher, which they said include unsustainable fiscal deficits and rising inflation expectations.
GLOBAL SELLOFF
Worldwide long-term borrowing costs have hit multidecade highs as governments pile on record debt amid successive crises from the pandemic to the Iran war, and to fund welfare as populations age and also to boost defence spending.
Rising long-term borrowing costs inflate government interest bills and reverberate across financial markets, where they serve as a benchmark for everything from corporate bonds to equities and real estate.
Germany's Finance Ministry told Reuters that Russian aggression was driving up funding needs for massive defence investment, pushing borrowing costs higher.
Surging yields have lifted Japanese borrowing costs to three-decade highs, pressuring government finances and the cost of paying for an ambitious spend-to-grow agenda.
In the United States, the national debt has topped $40 trillion, more than doubling since 2017 when Donald Trump was first sworn in as U.S. president, as the U.S. borrowed to pay for expensive pandemic responses and a long-running tax and spending imbalance.
Analysts said those underlying imbalances would continue to weigh on the market.
"I would not describe the increase in U.S. Treasury yields as being a function of or exacerbated by irrational market conditions," said Eric Robertsen, global head of research and chief strategist at Standard Chartered.
"The only conclusion we can draw is that yields reached a level that they don't like, and I think that suggests a willingness to try and control or intervene against natural supply and demand."
(Reporting by Rae Wee in Singapore, Caroline Valetkevitch, Gertrude Chavez-Dreyfuss, and Sinead Carew in New York, Suzanne McGee in Rhode Island, and Harry Robertson and Samuel Indyk in London; Writing by Tom Westbrook and Harry Robertson; Editing by Shri Navaratnam, Elisa Martinuzzi, David Holmes, Rod Nickel, Colin Barr)
