The Treasury Department’s efforts to restrain long-term borrowing costs through bond buybacks amount to “financial repression” that risks weakening the dollar and fueling inflation, according to Citadel Securities.
Treasury Secretary Scott Bessent last week expanded the buyback program after yields on longer-dated Treasuries climbed to the highest levels in years. CNBC reported Monday that Bessent could tap the Treasury General Account — its cash balance at the Federal Reserve — to fund the purchases.
Citadel argues the intervention could shift the market response to concerns over the fiscal outlook and inflation into the currency market, as lower yields reduce the appeal of the dollar and potentially lift import prices.
“More broadly, this amounts to financial repression at the margin,” Nohshad Shah, Citadel’s head of EMEA fixed-income sales, wrote in a client note. “Preventing Treasuries from clearing at lower prices does not eliminate that pressure. It merely shifts it elsewhere.”
Bessent’s decision to at least double buyback operations for 10- to 30-year securities signals that the administration is uncomfortable with elevated long-term yields, Shah said.
The move, however, has provided limited support to the market so far, as 30-year bonds erased their gains a day after the announcement. The dollar, meanwhile, has weakened and gold has rallied.
Suppressing long-term yields doesn’t remove the economic forces that pushed them higher, as loose fiscal and monetary policies are stimulating the economy at a time of full employment and heavy investment in artificial intelligence, Shah said.
A weaker dollar would ease financial conditions and potentially add to inflation through stronger demand and higher import prices, he said.
“The bond market’s message is straightforward: fiscal or monetary policy should be tighter,” Shah wrote. “The durable solution is not repeated intervention, but harder choices on fiscal policy and central banks willing to get ahead of inflation, including, if necessary, by hiking rates.”
This article was provided by Bloomberg News.