Wall Street collectively "pours cold water": The U.S. Treasury's expanded bond buybacks fail to suppress long-term yields; Goldman Sachs says it cannot solve the root cause of the sell-off

According to Zhitong Finance APP, several major Wall Street financial institutions believe that the recent expansion of long-term Treasury buybacks by the U.S. Treasury Department can improve market liquidity and temporarily ease the selling pressure on long-end U.S. Treasuries, but it is difficult to fundamentally reverse the upward trend of long-term yields. Institutions such as Goldman Sachs, Wells Fargo, Deutsche Bank, and Société Générale point out that macro factors, including fiscal deficits, inflationary pressures, capital expenditure on artificial intelligence, and the outlook for Federal Reserve policy, are the main drivers behind the continued rise in long-term U.S. Treasury yields in recent months.

After the U.S. Treasury announced the expansion of long-term Treasury buybacks last Wednesday, yields on 10-year and 30-year Treasuries dropped significantly at one point. However, the effect did not last, and long-term yields rose again in the latter part of last week.

U.S. Treasury Secretary Janet Yellen later stated that the Treasury has a "large toolbox" and can take more measures to stabilize the long-term Treasury market. It is reported that the Treasury might even consider using its General Account (TGA) cash reserves at the Federal Reserve to provide funding for some of the buybacks. However, several Wall Street institutions believe that unless the underlying issues such as the U.S. fiscal situation and inflation change, simply expanding the scale of buybacks will find it hard to sustainably press down long-term interest rates.

Goldman Sachs: Even with Expanded Buybacks, Hard to Truly Reset Long-Term Rate Levels

Goldman Sachs strategists George Cole and William Marshall stated in a report released August 21 that the U.S. Treasury’s expansion of long-term Treasury buybacks does not address the underlying reasons behind the recent volatility in long-end yields.

Goldman Sachs believes that factors driving the sell-off in long-term Treasuries include resilient U.S. economic performance, the market’s reassessment of the Federal Reserve’s policy path, persistent fiscal pressures, risks from energy prices, as well as AI-related capital spending and rising expectations for economic growth leading to increased funding needs.

Thus, even if the Treasury further expands the scale of buybacks, it is still difficult to fundamentally change long-term interest rate levels.

Goldman Sachs said: "We believe that even with a larger scale, buybacks themselves are unlikely to significantly reset rate levels."

The bank believes factors that could truly alleviate long-term yield pressure remain unchanged, including further cooling of inflation data, downward adjustments to economic growth expectations and reduced uncertainty regarding monetary policy.

Goldman Sachs also expects that after the Treasury expands long-term buybacks, it is likely to raise the necessary funds by increasing the issuance of short-term Treasury bills, so the direct impact of the buyback plan on the entire yield curve will still be limited.

Wells Fargo: New Catalysts Needed for Long-Term Yields to Truly Fall

Wells Fargo also believes that while the Treasury’s expanded buyback reduces the net supply of long-term Treasuries in the market and sends a strong signal that the government is concerned about market liquidity, it is not enough to drive long-term yields to continue falling.

Wells Fargo’s strategy team led by Erik Nelson stated that at present, new catalytic factors are required to genuinely push long-end yields lower.

Such factors may include further slowing in economic growth and inflation, reduced uncertainty around the Federal Reserve’s balance sheet and interest rate policy, the U.S. government advancing fiscal consolidation, or a decline in investment grade corporate bond issuance.

Wells Fargo also reminds that the market will soon focus on Fed Chair Powell’s speech at the Jackson Hole global central bank symposium.

If Powell delivers a hawkish message, reiterating the Fed's commitment to bringing inflation back to the 2% target and keeping open the possibility of further rate hikes, short-end Treasury yields could face renewed upward pressure.

Deutsche Bank, Société Générale, and Scotiabank Expect Further Steepening of the Yield Curve

Institutions including Deutsche Bank, Société Générale, and Scotiabank expect that the U.S. Treasury yield curve may steepen further, meaning that long-term yields may continue to rise relative to short-term yields.

This trend runs directly counter to Yellen's policy goal of lowering long-term financing costs through intervention.

Deutsche Bank believes that the Treasury’s expansion of buybacks shows the U.S. government is taking a more proactive debt management strategy and is willing to use policy tools and communication in a more flexible way to manage long-term yields.

Nevertheless, the bank still expects that after the short-lived rebound resulting from Treasury intervention, long-term yields may continue to climb and the yield curve could steepen further.

Société Générale also believes that the Treasury’s buyback plan is "unlikely to alter the broader forces pushing yields higher."

If there is no substantial change in the macroeconomic environment, the bank expects there is still room for long-term yields to rise further. However, larger-scale buybacks could help improve U.S. Treasury market liquidity and trading conditions and imply that the Treasury may take further steps in the future to ease long-term supply pressure.

Scotiabank argues that the recent rise in long-term Treasury yields has fundamental support and is not entirely due to market liquidity or speculative trading. As long as U.S. Treasury issuance remains high and nominal economic growth stays robust, long-term yields will likely remain under pressure.

Citi Is Relatively Optimistic, Bullish on 20-Year Treasuries

Compared to the cautious attitude of most institutions, Citi is relatively positive on certain long-term U.S. Treasuries.

Citi believes that the expansion of Treasury buybacks amounts to a certain degree of policy support for the long-term Treasury market. Coupled with more attractive current valuations, potentially increased demand from pension funds, and the possibility of weaker future economic data, the risk-reward proposition of 20-year Treasuries is improving.

Citi also argues that concerns that long-dated Treasuries have "become unanchored" may be exaggerated. If future Federal Reserve policy tilts dovish, actual money might flow back into the Treasury market after Labor Day.

Additionally, as 20-year Treasuries have underperformed 10-year and 30-year Treasuries so far, Citi thinks that if the Treasury adjusts its issuance structure in the future, 20-year Treasuries could be among the biggest beneficiaries.

BMO: Treasury Sell-Off May Not Be Over

BMO remains cautious on the short-term performance of Treasuries.

The bank believes that although the forthcoming July core PCE inflation data may continue to show relatively mild price pressure and the overall U.S. financial environment remains relatively accommodative by historical standards,

unless there is a more sustained decline in risk assets or a significant widening of corporate credit spreads that drives safe-haven flows into Treasuries, the sell-off in the bond market could have further to go.

BMO also points out that recent movements in the Treasury market suggest its traditional safe-haven status may be weakening.

Wall Street Consensus: Buybacks Can Improve Liquidity But Can't Address Root Problems

In summary, based on the views of many Wall Street institutions, the expansion of long-term Treasury buybacks by the U.S. Treasury is not without effect.

Buybacks can reduce the amount of long-term bonds circulating in the market, improve trading liquidity, and send a signal to investors that the government is monitoring long-end market pressures. In the event of extreme market sell-offs, these measures can also help stabilize sentiment.

However, the real problem is that the current rise in long-term Treasury yields is not solely due to insufficient market liquidity, but rather the result of multiple factors including fiscal deficits, inflation, economic resilience, AI-related capital expenditure, corporate bond supply, and uncertainties in Fed policy.

Therefore, institutions such as Goldman Sachs, Wells Fargo, Deutsche Bank, and Société Générale generally believe that without substantial changes to macro fundamentals, even further expansion of long-term Treasury buybacks by the Treasury will find it hard to suppress long-term yields in a sustainable way.

Going forward, the market focus will shift to U.S. inflation data, Fed Chair Powell’s signal at Jackson Hole, and whether the U.S. government will implement more substantive fiscal consolidation measures. Compared with simply expanding the scale of buybacks, these factors may be the key to whether the upward trend in long-term Treasury yields can truly be ended.