Treasury Intervened As Expected - Here’s What It Means

We got the Treasury intervention I wrote about on Monday and judging by some of the reaction, a lot of people seem to think this means the US economy is collapsing. It doesn't. A quick summary of what happened - Treasury officially doubled the maximum size of its liquidity-support buybacks in the 10–20Y and 20–30Y sectors from $2bn to $4bn per operation, effective from September 9 through November 4. This came after the 30Y pushed above 5.3% and for now, this intervention is much better to be viewed as debt management designed to break the momentum and reflexivity in the long end selloff and not some kind of emergency bailout or a Treasury put (yet). Some of you might remember this looks similar to what Yellen did, and it is. Her Treasury created the current buyback framework in May 2024 to improve liquidity in older and less frequently traded securities and help manage Treasury's cash position. So buybacks are not some emergency tool Bessent just invented and we have seen this before. The important difference is the timing because Yellen ran them as part of a longer and more predictable programme, while Bessent increased the size of long-end operations mid-quarter and right after the 30Y moved above 5.30%. There is also another interesting consequence I have not mentioned. Buying back longer-dated debt doesn't make the deficit disappear, Treasury still has to issue somewhere and that’s likely going to be into bills or the 5Y and 10Y sectors. If enough bill supply begins draining reserves or putting pressure on money markets, the Fed will find itself having to lean the other way through reserve-management purchases at the short end ak.a QE. That is not happening automatically and I wouldn't call it inevitable, but it is an important second-order effect to watch. Yesterday's intervention also pushed the curve towards a bull flattener (long-end yields falling considerably more than the front end). That, in addition to the potential QE helps explain why the dollar weakened while gold moved sharply higher as its a good regime for them. https://preview.redd.it/ertuql03rikh1.png?width=800&format=png&auto=webp&s=1e4843820c860adea83140f4506c0be7437487f2 For now however, I think this is more likely to mute the rise in yields than completely reverse it because nothing Treasury did yesterday fixes the fiscal deficit, inflation risk or pressure from corporate debt issuance or the war premium. You can see the correlation between bonds and hurmuz traffic below https://preview.redd.it/m8yz16kqqikh1.png?width=1080&format=png&auto=webp&s=9a0e082ea32ad25abcde37d6c04b40cd1e5e7952 It can slow the move, remove some of the reflexivity and make it more expensive to aggressively short the long end but cannot remove the underlying problem. Now it gets more interesting because these actions from Treasury's have just made Warsh's Jackson Hole speech much more important. He now has to acknowledge the tightening in financial conditions and prevent another disorderly long-end selloff, without creating the impression that the Fed is simply following Treasury's lead. If markets begin to believe fiscal can push Treasury into supporting long bonds and then force the Fed to validate that move we could see an even larger term premium. That brings me to yesterday's FOMC minutes, where one paragraph caught my attention - Warsh is considering reducing the number of scheduled FOMC meetings from eight to six per year, potentially beginning in 2027, allowing more data to accumulate betweendecisions. So Treasury is becoming more active in managing duration while Warsh is simultaneously trying to make the Fed less interventionist and less communicative. Thats why I think Jackson Hole matters a whole lot more than it did 24h ago. Now we watch the long end - if the 30Y settles down and yesterday's highs hold, Treasury probably achieved exactly what it wanted - break the momentum without having to do much more. What's likely to happen is yields push back through those highs despite the intervention in a test of Treasury's reolve which could pressure equties for a bit .. then we find out whether this was a one-off liquidity adjustment or whether Treasury is actually prepared to react again. Market Positioning for the SPY is looking much more balanced with the main resistance being the $770 and support at $765 and we’re likely to see some choppy action between those with the main level we might drift towards on OPEX ( tomorrow) at $760. I have closed my position there as I want to see how we trade into OPEX and wait for the bond market to digest the intervention https://preview.redd.it/k1vozngrqikh1.png?width=888&format=png&auto=webp&s=8d208c1b52180b5319e4536707498895d9af7dd1 Qs are similar and as I've been saying, spot tends to mvoe towards the main level on the market positioning chart ( right) as we go into OPEX so with all of this happening i prefer to be flat. https://preview.redd.it/vz1v3sksqikh1.png?width=858&format=png&auto=webp&s=6e65a7ffba756743d0b7b324669b7e6101323309