US Dollar: Bond buybacks reshape yield dynamics – MUFG

MUFG’s Lee Hardman notes that the US Dollar has softened over summer as the US Treasury’s announcement to at least double long-term bond buybacks undermined confidence while inflation risks rise. The first larger operation’s maximum size was tripled to USD6 billion, initially lifting long-term yields and giving the Dollar a brief relief rally that later faded.

Treasury actions weigh on Dollar

"At the same time, the weaker US dollar over the summer was triggered by the US Treasury’s announcement on 19th August that it planned to at least double the size of long-term bond buybacks. The announcement triggered a US dollar sell-off and it has since remained around 1% weaker. The Treasury’s efforts to dampen/cap long-term yields undermined confidence in the US dollar at time when upside inflation risks are increasing."

"Further details of the US Treasury’s expanded bond buyback program were announced yesterday when it was revealed that the maximum size of the first bigger bond buyback operation was tripled from USD2 billion up to USD6 billion. In response long-term US yields initially jumped higher with the 30-year yield rising by around 5bps and has since settled about 2-3bps higher. The price action could reflect some initial disappointment that the size of the bond buyback was not even bigger."

"In contrast, the US dollar staged an initial modest relief rally but that has largely reversed now."

"If the US Treasury continues to hold 9 bond buybacks each quarter, and purchases up to USD6 billion at each operation then it could give a rough ballpark figure for potential annual purchases of just over USD200 billion. It would be a smaller version of the Fed’s ‘Operation Twist’. Admittedly, it is highly uncertain how long the bigger purchases will be sustained and it is possible the size of operations could even be increased further going forward."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)