The Bond Coup

00:00:00: The US Treasury just pulled off a bond coup yesterday by doubling long-dated debt buybacks.

00:00:06: Washington is now trying to tame the soaring yields, especially on the long end of U.S.

00:00:11: yield curve as US debt blasts passed a forty trillion USD mark.

00:00:16: Mark has reacted instantly yesterday!

00:00:18: Long term yields plunged and the U. S dollar tanked against.

00:00:21: most majors and equities caught some relief but the fix comes with cash.

00:00:25: obviously So welcome to Swiss Coats.

00:00:28: daily Market Talk is Thursday, the twentieth of August.

00:00:32: I'm Yipega Skardishke here and today i will discuss why the latest news from The US Treasury so problematic in how it could affect markets.

00:00:56: You couldn't have missed it.

00:00:58: Yesterday was marked by a coup, A coup from the US Treasury Department that suddenly came up and announced that its will at least double The maximum size of its buyback operations survive more longer term debt.

00:01:11: By hands, it means that it will have to issue a short-term debt to finance exploding US state levels hoping to ease pressure on long-term yields and accessorily lower the bargain cost by issuing more short-terms at lower yields.

00:01:26: The market's reacted heavily to the news!

00:01:28: The

00:01:28: U.S.'s

00:01:28: ten year yield immediately fell.

00:01:30: It fell eight basis points while the thirty year yield dropped ten basis points from the highest level since The latter drop in yields helped supporting equity valuations, the S&P-Five hundred eaked out a small point.

00:01:42: twenty one percent gain yesterday.

00:01:44: But the operation remains still short of reversing the chip route.

00:01:47: than XMI conductor ETF lost one point.

00:01:50: fifty five percent.

00:01:51: regardless then in the effects US dollar tanked back time letting major currencies and gold rally aggressively.

00:01:59: This morning we see U.S bonds and FX consolidate as investors question What does the Treasury's announcement yesterday really mean?

00:02:07: And what could be a longer-term impact on US debt and broader financial markets.

00:02:12: So first, it is important to note that U.S.

00:02:14: national debt crossed the forty trillion USD mark.

00:02:17: so the news didn't just come suddenly.

00:02:18: It came as the U. S. National Debt Crossed The Forty Trillion USD Mark.

00:02:24: That's huge level!

00:02:25: This country should pay interest on this debt and net interest payments are now the third biggest expense in the United States.

00:02:33: Also, the U.S now borrows money to pay interest on existing debt and fiscal policy under Donald Trump is not coming out well.

00:02:40: instead of restricting fiscal policies and raising taxes through narrowing the gap The trump administration favours lower taxes And try to fill in the gap by spending cuts and tariff revenues.

00:02:50: This why we could also see the tariff cheaters heat up In the coming days.

00:02:54: as such the US fiscal picture today remains as murky if not murky As yesterday but way the government Is now willing To finance instead and the weight of the Federal Reserve.

00:03:05: The role of the federal reserve in this picture have changed, In the short one.

00:03:08: ,the impact is relatively straightforward as we saw yesterday.

00:03:12: .The Moon Least Tree Flattery Yield Curve & Easing Pressure on Longer Term Eels helps households with mortgages financing and corporations with borrowing costs that also come lower.

00:03:22: so thats positive development.

00:03:24: This is why equities reacted possibly for US dollar.

00:03:28: Lower long term yields are initially negative.

00:03:30: obviously used the attractiveness of US assets to international investors.

00:03:34: So that's also why the U.S.

00:03:36: dollar sold off so aggressively yesterday against major peers, but in finna if you're looking fundamentally this operation changes the maturity after u.s debt But it does not change The amount of debt that the us has.

00:03:50: more short-term borrowing means lower yields because they yield curve is tending.

00:03:54: It also needs a more frequent financing and if race remain high This where we've got get the fed to play along, the government's interest bill adjusts more quickly.

00:04:03: So you need to get the Fed to play a long and keep interests rates

00:04:07: low.".

00:04:08: And this is where longer term risk lies if investors conclude that Washington isn't increasing.

00:04:13: they're trying to manage long-term borrowing costs rather than addressing their fiscal deficit itself?

00:04:20: If they believe that the Fed no longer pursing its mandate goals meaning inflation and employment but it is percing the governments political goals instead Well, they could eventually demand a higher term premium to hold long dated US Treasuries.

00:04:35: So that's the big problem in terms of Fed while it looks like is really becoming its top puppet and this scenario to do White House to keep interest rates as low as possible tamed pressure on short end hoping that it will also tame the pressure on longer hand.

00:04:48: but the fed would lose credibility very quickly And if that happens It'll fail to control the short-end off yield curve effectively.

00:04:55: So in summary, the Treasury may have found a way to buy some time.

00:05:15: nor the positive pressure on the entire yield curve.

00:05:19: The latter, along with a loss of appetite for U.S.

00:05:22: treasures altogether should continue to weigh in on the U. S. dollar and on the US dollar structurally.

00:05:28: Looking elsewhere while inflation figures from the Euro area and United Kingdom yesterday painted an unideal picture that probably added to the positive pressures for the euro and for sterling against the US Dollar In the UK the producer prices fell in July due to retreats.

00:05:45: but what?

00:05:45: consumer prices came in hotter than expected by analysts as a thirteen percent rise and the energy price captures boosted inflation for households.

00:05:55: Across the channel, The Euro Area Inflation figures printed numbers that didn't match European Central Bank's inflation goal of two per cent either or worse they are expected to move higher at next reading coming months after July.

00:06:10: Energy Price Retreat which we saw due Then, fruit.

00:06:15: temporary with no easy resolution in the Middle East and coming weeks.

00:06:19: So inflation numbers are poised to move higher, The letter is adding to the hawkish expectations from both the European Central Bank and the Bank of England.

00:06:27: but here because growth outlooks diverge while impact on euro and sterling will not be the same.

00:06:32: so if we compare US-UK under your area and central banks policy stance regarding inflation well the european central bank stands out as a most disciplined central bank for controlling inflation.

00:06:44: Bank of England, on the other hand would also avoid an overheating in inflation.

00:06:48: But the problem is that UK's economic outlook remains very much dull today despite its surprisingly stronger than expected first half this year.

00:06:57: The weak jobs data released earlier last week came as a warning that Burnham's pending first budget and the Middle East energy headwinds made the bank less likely to act roughly like the European Central Bank in the UK because growth outlook is very much vulnerable.

00:07:17: And as per the Fed, well yesterday's FMC minutes actually showed that some Federal Reserve officials favor raising interest rates if inflation didn't decline.

00:07:25: This is how you would react as a fed official right?

00:07:28: But the Fed's reaction function to inflation and its policy goals are getting cloudier by today As we talked earlier in this episode under his new chair Kevin Warcht That may be pursing other more politically driven objectives than inflation and employment per se uncertain today, more uncertain than yesterday.

00:07:50: So I feel less the US seller euro and sterling in terms of expected discipline off their central bank's monetary policies.

00:08:09: well-bid against sterling as well.

00:08:11: Elsewhere, gold that has come under the pressure of rising global yields since August and also have potential to extend its gains if the pressure on longer term yield remains contained at least for a while.

00:08:22: And gold remains very much interesting for portfolio indeed If global risk sentiment worsens and increases capital into less riskier assets such as Gold.

00:08:30: So I'll summarize all this in the short one.

00:08:33: While shifting allocations towards sovereign and corporate bonds especially corporate bonds was very interesting recently it makes sense.

00:08:40: It's made sense for a while, tips in this configuration looks increasingly interesting to me offering investors exposure to still attractive real yields while providing some protection against inflation risk stat conventional treasuries do not address but again I would still maintain an increased exposure to gold and the actual environment give my portfolio hedge against inflation.

00:09:02: The sovereign debt risks and geopolitical risks as well.

00:09:05: they're all looming on the background today.

00:09:08: So this is all for today.

00:09:10: I'm Ipekir Skardishke and thank you for joining me, And Thank You For All Your Beautiful And Supportive Comments!

00:09:16: I hope that episode of Market Talk has been helpful... ...and it's been insightful to you.

00:09:21: so please do not hesitate To leave your comments, reactions & questions below.

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00:09:46: So I Will Meet you Again Tomorrow Until Then Good Day.

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