On August 19, the US Treasury quietly, without public statements in the press, updated the schedule of buyback operations – the repurchase of its own bonds. Formally, this is a technical measure for managing liquidity in the debt market. In reality, it is the first official acknowledgment that the Treasury market is cracking at the seams, and the first real test of where the dollar will go next. Analysts’ conclusion is the following: the correction in the US dollar has already begun, and the buyback is not the cause but a symptom.
What Happened?
Formally, the news looks modest. The Treasury doubled the maximum size of buyback operations for bonds with maturities of 10-30 years – from $2 billion to $4 billion per operation, starting September 9 and lasting until November 4. The money for the buyback will not come from the budget but from new short‑term debt: essentially, the Treasury is swapping long‑term obligations for short‑term ones, hoping to ease pressure on the long end of the yield curve.
Why Did They Do This at All?
The yield on 30‑year bonds reached 5.31% on August 17 – a level last seen in 2007. Two weeks earlier, in its quarterly borrowing report, the Treasury was still assuring the market that buyback sizes would remain unchanged. And just a few days before that, total US government debt officially surpassed $40 trillion. The decision turned 180 degrees very quickly – and that alone is a signal.
The reaction was immediate but short‑lived: the yield on 30‑year bonds rolled back to 5.18-5.19%, and the yield on 10‑year bonds – from 4.68% to 4.63%. Indices, precious metals, and even cryptocurrencies rose on the news, but as the market began to understand what had actually happened, the euphoria quickly faded.
This chart is the essence of the problem. Analysts point out that the pullback in yields after the buyback looks pale against the backdrop of the broader trend. The 10y10y forward rate – that is, the yield the market is pricing for a ten‑year period starting ten years from now – has been rising and continues to rise. The buyback bought the market a couple of days of calm, not a trend reversal.
Why This Is a Worrying Signal Rather Than a Technical Measure
The United States is choosing Japan’s path. There are two factors:
- The first – yields have crossed the pain threshold for the US budget.
- The second – far more significant – is that the authorities are not ready to address the root cause, namely the ballooning budget deficit. Instead, they have chosen financial engineering that masks stress in the Treasury market rather than eliminates it.
When fiscal policy gets out of control, governments are tempted to artificially hold down yields – through the printing press, central‑bank bond purchases, or any form of quantitative easing. The problem is that the risk premium the market demands for holding your debt does not disappear. If you don’t give it through yield, the market takes it through the currency. A debt crisis becomes a currency crisis. This is precisely why the yen has been weakening for years – not despite the Bank of Japan’s (BoJ) efforts, but largely because of them.
There is a useful “natural experiment” confirming this logic using Japan as an example. In January, Prime Minister Takaichi announced her intention to abandon “excessive” fiscal austerity. The next day, the yield on 30‑year Japanese government bonds jumped sharply – the market instantly priced in the risks. This episode was the first this year to force the United States to intervene in yen trading: the New York Fed conducted a so‑called “rate check” on January 23. But even after the most serious FX intervention of the year, the dollar/yen pair quickly returned to weakening. If the issue were simply market irrationality, the intervention would have worked. It didn’t – because the source of pressure is not the exchange rate, but the debt.
The parallel with the United States builds itself. The buyback is not quantitative easing in its pure form, but essentially the same idea: remove pressure from the long end of the curve without touching the deficit. And the deficit is left untouched because the administration currently has few real tools to deal with it – and even less desire.
The Dollar Weakens, Gold Rises
After the buyback news, the dollar dropped sharply and updated its yearly low against emerging‑market currencies. The DXY index rolled back to a three‑month low around 98.5 after a steep plunge in the middle of the week.
At the same time, the “debasement trade” returned to the game – this is what analysts call the bet on safe‑haven assets such as gold and currencies of countries with low debt, driven by fears that pension savings across the developed world will be “burned” by inflation. This theme gained momentum again after the July 29 Fed meeting, and following the buyback, gold and other precious metals surged sharply – the price of gold approached $4,550 amid growing investor concern over US government debt.
Bottom Line
The US Treasury’s buyback on August 19 will not, by itself, crash the dollar. But it is the first official confirmation of what the market already suspected: the United States has no plan to bring its budget under control, and instead will rely on tools that relieve symptoms rather than treat the cause. This is exactly what the first phase of Japan’s path looked like – not a collapse, but a slow, years‑long depreciation that becomes extremely difficult to reverse once it begins. This is not panic yet. But it is already a noticeable blemish on an asset that the entire world has considered risk‑free by default for decades.
Trader’s Corner
- DXY: the 98.5 level is a three‑month low and the nearest zone to watch. A break below opens the road to a continued downtrend for the dollar against G10 and EM currencies; a rebound to 99.5-100 should still be viewed as a correction within a weak trend, not a reversal.
- XAU/USD (gold): the uptrend remains intact, but the “debasement trade” tends to form bubbles – entering at market during panic is no longer a good idea; it is more reasonable to wait for pullbacks.
- Key triggers ahead: the debut of the new Fed Chair Kevin Warsh at the Jackson Hole symposium, August PMIs for the US and the Eurozone, and – most importantly – the quarterly borrowing meeting on November 4, where the Treasury promised to clarify future buyback sizes.
- What is really worth monitoring: not the 10‑year yield, but the 10y10y forward rate – it is currently the best indicator of whether the market believes in the sustainability of the US fiscal trajectory, bypassing short‑term measures like the buyback.
*This material has been prepared for analytical and educational purposes. It does not constitute investment advice.
**Based on materials by
- Robin Brooks – Former Chief Economist at IIF and Chief FX Strategist at Goldman Sachs.
- US Department of the Treasury
- Bloomberg – Bessent\’s Treasury Buyback Expansion Spurs Drop in 30-Year Bond Yields
- NBC News – Bond yields fall after Treasury announces surprise move to ease rising rates
- Council on Foreign Relations – What the Treasury\’s Buyback Surprise Says About the Bond Market
- Forbes – Treasury Is Buying Its Own Bonds. Where Is The Money Coming From?