FUNDAMENTAL OVERVIEW Gold surged on Wednesday after the US Treasury announced that it will at least double the size of its liquidity-support buyback operations for longer-dated Treasury securities, increasing the maximum purchase from $2 billion to at least $4 billion per…
eration. US Treasury Secretary Bessent then said that part of the operation was sending a message to the market that yields do not reflect underlying fundamentals and added that the buyback could be more than $4 billion depending on conditions
The Treasury intervention in the market had a QE-like effect by lowering long-term yields and easing financial conditions, although it’s not technically QE. The US Treasury announcement brought down real yields as inflation expectations rose faster than long-term nominal yields due to the Treasury’s intervention. In the long-term, long-term yields are driven by monetary policy as they are just the average expected path of short-term interest rates over the life of the bond plus a term premium, but they are more sensitive to changes in economic outlook.
That’s why the focus will now shift to the Federal Reserve and Warsh’s speech at the Jackson Hole Symposium next week. I was expecting it to be a non-event given Warsh’s preference of not giving forward guidance and the fact that the soft NFP and CPI reports eased Fed tightening concerns. After the Treasury buyback announcement, though, the speech could actually be a market-moving event.