Citigroup’s global head of macro and asset allocation strategy, Dirk Willer, told Reuters that the U.S. Treasury’s recent move to cap long‑end borrowing costs below 5.30% could ultimately weigh on the dollar. By limiting yields, the Treasury may push investors toward bonds that are not subject to central‑bank caps, creating a negative impetus for the greenback.
Policy shift and market reaction
Last week the Treasury announced a plan to double the size of its buyback program for long‑duration bonds in an effort to support borrowing costs. Willer said the action did little to ease concerns about global duration risk and may even raise the “term premium” – the extra compensation investors demand for holding long‑maturity debt.
The higher term premium pushes up long‑term yields, which affect mortgage rates, corporate borrowing and other long‑term financing. The 30‑year Treasury yield recently rose to 5.327%, its highest level since 2007, as the United States runs one of the largest deficits on record and inflation remains elevated.
Citi’s positioning
Citi had been underweight Treasuries but adjusted its stance after the Treasury announcement, adding gold and maintaining a short position on the dollar. Willer noted that beyond direct Treasury or Federal Reserve actions, other tools – such as larger buybacks, phasing out the 20‑year bond, or regulatory changes – could be used to encourage banks and other market participants to increase Treasury holdings.
“In proper bond crises, there are often market‑microstructure issues that policymakers can address,” Willer said. “Ultimately the question is how many bullets do they have, and when do they run out? We think they still have a fair amount of bullets, while others think they’re close to running out.”
Bond‑OIS spread and fiscal risk
U.S. 30‑year yields have risen in line with matched overnight index swaps (OIS), keeping the bond‑OIS spread relatively contained. This suggests the sell‑off has been driven more by a repricing of rates than by specific Treasury credit concerns.
“If you look at what drove the sell‑off, asset‑swap spreads were quite well behaved. And that’s really where fiscal problems should show up most clearly,” Willer added, noting that the broader market may be pricing in fiscal risk rather than sovereign credit deterioration.
He cautioned investors to watch positioning for bonds to outperform swaps as the market heads toward November, when Treasury yields could face further pressure.
Original reporting: Appleton, WI News Feed (HLL/CB) — read the source article.
