U.S. Treasury Doubles Bond Buybacks to Cap Borrowing Costs

The United States Department of the Treasury doubled its buyback sizes for long-duration bonds in an effort to cap long-end borrowing costs below 5.30%. This intervention follows a period of significant volatility where the 30-year Treasury yield reached 5.327%, the highest level since 2007. The surge in yields is attributed to record government deficits, elevated inflation, and increased debt issuance from AI hyperscalers.

Dirk Willer, Citigroup's global head of macro and asset allocation strategy, suggests these aggressive measures could weaken the U.S. dollar. He argues that investors may seek assets outside of central bank caps to protect against fiscal deterioration. In response to these developments, Citigroup adjusted its positions to increase gold holdings and maintain a short position on the dollar.

While the Treasury may consider further tools, such as phasing out the 20-year bond or implementing regulatory changes to encourage holdings, Willer notes the current sell-off reflects a repricing of underlying rates rather than a collapse in sovereign creditworthiness.