By Qudsia Bano

Despite a sharp expansion in US Treasury buybacks, long-term yields have failed to fall. This disconnect highlights the limits of liquidity operations when investors remain concerned about inflation, heavy government borrowing, and the outlook for Federal Reserve interest rates.

The US Treasury announced in August that it would at least double the maximum size of liquidity-support buybacks for 10-to-20-year and 20-to-30-year nominal securities from $2 billion to at least $4 billion per operation, effective from September 9 through November 4.

The first enlarged operation was subsequently set at up to $6 billion, but long-term borrowing costs continued to rise. Federal Reserve data show the weekly average yield on the benchmark 10-year Treasury note increased from 4.78% in the week ending September 4 to 4.89% a week later and 4.99% in the week ending September 18.

The 30-year Treasury yield showed a similar pattern, rising from 5.26% in the week ending September 4 to 5.31% on September 11 and 5.34% by September 18.

The persistence of high yields suggests that the buyback programme is improving liquidity in older securities without changing the broader forces determining long-term interest rates.

Speaking to Wealth Pakistan, a Manager Treasury at EXIM Bank of Pakistan who wished to remain anonymous said the market reaction showed that buybacks alone were unlikely to offset concerns about inflation and the scale of US government financing needs.

“The buyback can improve liquidity and absorb some supply from specific parts of the curve, but investors ultimately price long-term bonds on inflation expectations, the policy-rate outlook and future debt issuance. If those factors remain unfavourable, a larger buyback by itself may not be enough to push yields materially lower,” he said.

Treasury itself stressed that the programme was designed primarily to support market liquidity rather than reduce the government’s overall financing requirements.

It estimates privately held net marketable borrowing of $739 billion in the July-September quarter and another $628 billion in October-December.

The department also said that buybacks were not expected to significantly reduce net marketable borrowing because newly issued securities replace the debt that is repurchased.

For September, Treasury planned auctions of $39 billion in 10-year notes, $13 billion in 20-year bonds and $22 billion in 30-year bonds, underlining the continuing volume of long-dated supply entering the market.

Talha Rauf, Investment Analyst at AKD Securities Limited, said sustained high US yields could also tighten financial conditions outside the United States.

“When Treasury yields stay elevated, they raise the global benchmark for risk-free returns. That can make investors more demanding on emerging-market debt and can increase the cost of raising dollar financing for sovereign and corporate borrowers,” he said.

The pressure on long-term yields has also been reinforced by monetary policy. On September 16, the Federal Reserve raised its target range for the federal funds rate by 25 basis points to 3.75-4.00%, keeping attention firmly on the possibility that US interest rates could remain restrictive for longer.

A recent Federal Reserve research paper also found that the Treasury market had become more price-sensitive as foreign official participation declined and private investors such as hedge funds became more important. It estimated that a $100 billion increase in Treasury supply currently raises five-year yields by around three basis points.

The latest developments therefore suggest that larger buybacks may improve trading conditions at the long end without necessarily lowering yields. The programme addresses liquidity in particular securities, while the broader level of borrowing costs continues to reflect inflation expectations, monetary policy and the volume of government debt entering the market.

For investors, the direction of long-term US yields will therefore depend more heavily on inflation, Federal Reserve policy and the scale of Treasury issuance than on buybacks alone.

Credit: INP-WealthPk