To The Moon

While the market remained focused on the probability of a Federal Reserve rate hike, the U.S. Treasury released a surprising announcement last week. The Treasury announced that it would “at least double” the size of its liquidity-support buyback operations for Treasury securities maturing in 10 to 30 years, raising the cap for each buyback from USD 2 billion to at least USD 4 billion. Relative to the USD 31 trillion U.S. Treasury market, this buyback volume is negligible. Nevertheless, the Treasury’s move conveyed several messages to the market. First, long-term bond yields are too high, and the Treasury intends to exert some control over them. Second, Treasury yields around 5% may represent a psychological threshold for the U.S. Treasury; if yields deviate too far from that level, more forceful intervention could follow.

It is important to clearly distinguish Treasury buybacks from Federal Reserve buybacks. The Federal Reserve purchases bonds with newly created money, which is essentially money printing through quantitative easing (QE). The Treasury itself cannot create new money. To repurchase long-term bonds, it must rely on tax revenue or funds raised by issuing other securities. Treasury buybacks therefore largely involve replacing long-term debt with newly issued short-term debt. In substance, they do not create additional money and are not quantitative easing in the financial sense.

In theory, issuing low-interest short-term debt and then purchasing higher-yielding long-term debt to capture the interest-rate spread may appear reasonable. However, this approach may overlook its impact on market confidence. If the Treasury’s efforts to “support the market” are poorly executed, they could instead accelerate the widening of the spread between short- and long-term bonds.

Where Are the Corresponding Investment Opportunities?

1. Watch for a Breakout in Long-Term Treasury Yields

The Treasury’s increased buybacks are favorable for the long-term bond market in the short term. However, whether they could eventually undermine confidence in long-term Treasuries and prompt investors to sell them remains an important issue to monitor. At present, yields on 20- to 30-year Treasuries are consistently above 5% and moving within a narrow range. Investors may consider trading the long–short yield spread after a breakout in long-term yields—specifically, a spread-arbitrage position that goes long 10-year Treasury yield futures and short 2-year Treasury yield futures.

2. Gold Has Rebounded to Its Expected Price; Wait for a Clearer Rate Direction

Since July, I have remained bullish on a rebound in gold prices. The buyback of long-term Treasuries has temporarily affected expectations for interest-rate hikes, but whether rates will actually be raised remains unresolved. I therefore do not expect gold to continue its bullish run in the short term. In addition, a technical rebound after four consecutive months of declines is consistent with historical patterns. Short-term investors may therefore consider taking some profits, while those seeking to add to long positions should manage their exposure prudently.

3. U.S. Equity Indices Are in a Sensitive August Window—Watch the 20-Day Moving Average Closely

August is a sensitive period for U.S. equity indices. Without the unexpected news regarding the Treasury’s additional purchases of long-term bonds, U.S. equity indices would probably have remained relatively stable. However, given the emergence of this surprise and the market’s current sensitivity, investors should continue to monitor the 20-day moving average and prepare for potential risks. The Nasdaq and S&P indices are currently trading near their 20-day moving averages. If they break below those averages again next week, it may be advisable to temporarily exit the equity-index market and wait for the trend to become clearer before re-entering.

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