Market Bounces on US Treasury Buyback Doubling

The US Treasury's move to increase buybacks of long-term debt initially left the market buoyant, but it also suggests liquidity and confidence concerns about the US's ability to pay, boosting gold and other dollar alternatives.

Why the Market is Reacting

• The US Treasury doubled its buyback of long-term debt to push down yields, weakening the dollar and supporting gold.
• Markets are on alert as the move suggests liquidity issues and a shift in policy from the Fed towards the Treasury in managing market liquidity.
• Fed minutes were more hawkish than expected, but odds of a Fed hike remained unchanged as policymakers seem concerned with borrowing costs.

US Treasury Steps up "Operation Twist"

Gold jumped as the dollar weakened and stocks rose yesterday after the US Treasury announced it would double the amount of long-term bonds it was buying back to support liquidity. The move came after yields on the 30-year Treasury reached 19-year highs and total US debt crossed the $40T threshold. Markets have become increasingly concerned about the US government's ability to service its debt amid higher interest rates, which would presumably have to increase even more to counter high inflation. Servicing the debt is the government's third largest expense (after pensions and health care), eclipsing spending on defence. The move is the latest in a series of efforts to preserve liquidity and provide stopgap support in the bond market through emergency measures. Dollar alternatives like bitcoin and especially gold saw a strong increase, with the precious metals market rising by $1.5 trillion in valuation in the hours after the announcement.

While the move is relatively modest – increasing to $4 billion from $2 billion – and would run for only a couple of months, investors are both relieved and concerned, as it could complicate the Fed's efforts to rein in inflation. The Fed conducted a similar operation in 2011, selling shorter-dated bonds to buy back longer-dated ones to lower the slope of the yield curve. The Treasury's actions suggest a shift from the Fed to the government and could represent a big change for traders. Previously, both Treasury Secretary Scott Bessent and Fed Chair Kevin Warsh suggested that the government should manage liquidity while the Fed focuses on price stability. This would mean the Fed is less likely to intervene in the bond market, such as with quantitative easing, one of the tools used in the past. The latest minutes showed that the Fed is concentrating on interest rates as its main policy tool. The move could make investors more concerned about available liquidity as the Fed steps back from its role in providing it. Measures such as selling euros to buy yen a couple of weeks ago in an effort to avoid Japan selling Treasuries have also signalled concerns about liquidity in the bond market, often a sign that precedes a market correction or crash. On the other hand, the range of bonds targeted is crucial for business funding and mortgages and could support growth in the medium term if a crisis does not occur.

Gold Higher, But Can It Keep Going?

The yellow metal jumped 3% after the announcement, hitting two-month highs, as it implies lower long-term yields. But it retreated a bit in early trading on Thursday as markets digested the implications of the Treasury move and investors booked profits. Meanwhile, the dollar was near 3-month lows despite the FOMC minutes giving off a more hawkish tone. The odds of a Fed rate hike have remained fairly unchanged, with two-thirds expecting a hold at the September meeting. However, the Treasury move suggests a concerted effort to bring down yields, which would likely support the US economy and weaken the dollar, both positive for gold’s trend.

Yellow Metal in Uptrend While Above Mid-VWAP

With the yellow metal breaking above the major descending ‘pro trends’ trendline near $4400, the next resistance above the upper VWAP at $4580 lies at $4770. If the trend fails to continue as the RSI diverges, a move back under the trendline would expose the middle VWAP at $4270. This would still keep the trend intact, with only a breakdown of that level opening the door to $4K.

Source: SpreadEx | Gold, Daily Chart