US Treasury buyback announcement sets fire to the US dollar.

Welcome to the Sanxo Market Call. Before we get started, it's important we emphasize that the views and opinions expressed in this podcast are those of the hosts and guests and do not constitute investment advice or recommendations. All information provided is for educational and entertainment purposes only. Hey, one, it's Thursday, the 20th of August, 2026, and while what a development yesterday, the signal value more than the monetary value of, of course, the U.S. Treasury announcing some alterations to its buyback program. We'll be getting deep into that. So many questions. This is a sparking and commentary and I know better than you kind of comments as well. I don't know better than anybody else. I'll put that in there as a caveat, but I think I hopefully will raise some of the most important questions that come from this, a long story short, though. So we get this announcement basically increasing the size of these, supposedly, these liquidity operations that the Treasury conducts to keep Treasury market functioning nice also for maybe less liquid bonds that are less in demand, et cetera. And then for the 10 and out to 30 year portion of that, these operations are being increased from two to four billion, and that is effective as of September 9th. So earlier than I guess was anticipated around the next announcement related to this whole buyback operation, which was scheduled for November 4th. And supposedly in the November 4th, we'll get some more information incoming. So what is the Treasury trying to do here? Well, I think the number one obvious thing here is that the timing of this coming as all the headlines and the Saxon market call podcast are saying that noting that the 30 year yield has gone to the highest level since 2007. And this is a clear signal that the US Treasury doesn't like that. It does not want these longest yields spiraling higher and higher. Of course, the 30 years also are really critical for where most US mortgages are financed, which are 30 year fixed mortgages. So that's part of the equation as well, that's signal number one. Some say it's a terrible signal of weakness because this is a small program relative to the overall size of the market and it suggests the Treasury is already panicking here and rolling out such a program. And then others just say, oh, this is yield curve control, which it obviously is not because it is too small to control anything other than as a signal value in terms of, well, they don't want these yields to just fly higher, but the amounts are not enough to do anything about it. Whereas when the Fed, for example, does yield curve control or did yield curve control, it is going to be doing it in tremendous size and with tremendous power. And then sort of the practical angle of this now, this doesn't mean anything really for overall US finances, except at the very, very tiny fraction of maybe a hundredth of a percent margin. And that's the notion that if you buy back a Treasury, let's take a 2050 US T bond that was issued, of course, what year is a 30 year in 2020. The coupon might be, I think they're down to one, one and a quarter percent and that bond might be trading sub 50 levels. So when you're buying that back, you're erasing half of the face value of the debt that that instrument represented. And then you can refinance at the front end of the curve. The disadvantage being that your cost of financing is still just as high because you're not just as high, but whatever the Fed policy rate is versus that effective rate, which was on a much larger face value of the original bond. So the only thing that would gain you is if you're running a decent fiscal budget deficit and especially if you're planning on having much lower rates in the near future and then you can roll into lower rates and then you've saved something out the other end. This is not a serious ability for the Treasury to refinance the US debt structure. I mean, the average weighted duration or maturity of all the US Treasury debt outstanding, at least coupons, coupon treasuries is 3.3 years. I say coupons because sub 12 months are talking about T bills. So it's not really aimed at that. What is it aimed at then? Again, I think it's signal value. Treasury is panicking to a degree, does want yields lower, thinks that maybe by sending this signal, its credibility is sufficiently large that people won't at least attack the Treasury market and want to flush their holdings because they don't know where, how high the Treasury is going to let these yields go, et cetera, et cetera. If you're holding a long duration asset, it gets a bit dicey with the total returns from a year to year if yields are supposed to go 6, 7%, et cetera. So there's that angle and then with that angle comes the idea that maybe a US-based holder of a long-term asset finds some solace in this, well, they're not going to allow treasuries to go that much higher. But if you're a foreign holder of any Treasury, but especially long held treasuries, you say, okay, wow, the free market does not reign potentially at the long end of the curve, especially. Do I want to hold these treasuries, maybe I don't have to worry about it from a yield angle, et cetera, but I do have to worry about it from a currency angle. So it's the currency that's going to absorb the pressure. And as indeed, what we saw yesterday, the dollar found there's a very negative and for very good reasons because this is the Treasury essentially weighing in on the US Treasury market and therefore US yields. So what we're back to the most within FX, the in-reacted quite strongly, justifiably, so I'll get to in a minute why maybe it's underreacted to a degree relative to what you might think in the move yesterday, but it was the Swiss franc that reacted the most. And I think that's a question of positioning. Let's think about the Japanese yen. A lot of that positioning in yen carry trays was not particularly heavy. And then the massive slap from Japanese official intervention and even coordinated intervention with the US to a degree had probably taken down positioning very considerably and people getting back short yen were doing so cautiously, fearing the next round of intervention. So there wasn't a whole big positioning angle to that whereas with the Swiss franc, there was definitely a positioning angle. We had Euro Swiss trading at one of your highs into zero spot 94, just ahead of this announcement and that got smacked about a percent lower at the biggest part of the move. And Dollar Swiss notably, obviously more so with the dollar weakness and you've had Euro Dollar trading up to 117, but Dollar Swiss all the way down well below zero spot 80. And I think that was where the positioning adjustment was the greatest, whether the, you know, the SB might start to lean in against this and whether it's an amazing new trend that develops in Swiss franc. I'm not sure, but it's just to explain the immediate size of the reaction there. Now why could the yen under react to a bit? Well, we did see JGB's actually rally very, very stiffly overnight and in fact the 30 year JGB was down around 4% at one point. I think it traded or it closed a few basis points above that actually felt more than it's a US counterpart in the session. It was down a decent total over the last couple of days. So that's kind of a sign of stability there. I mean, if the US is going to control its yield curve and Japan hasn't made any new announcements, the Japanese saver might say, well, I've got the wind at my back for for being long JGB's at these yield levels relative to risking whatever is the US is doing here and the yield comparison is not that unfavorable now at the longer end of the curve, et cetera. On the other hand, if this is the treasury panicking and we all have to worry about holding bonds per se and especially if US yields start to go back higher at the long end, meaning the next round of intervention, et cetera, then the same, the same worry is going to propagate to Japan given its debt structure, et cetera. So it's kind of interesting to me to note your yen is popping back above 185 and just almost running away back up to the upside again, a little bit surprised at the in-reaction, but it kind of makes sense if there's still this general fear around the ability of and applications of a visual dumb to control these long yields. When looking at out across asset classes, what was the most got the most of a boost here? It wasn't even just gold. It was Bitcoin. Look at your Bitcoin charts. Bitcoin has suddenly come alive. This is a massive signal for crypto. If crypto wasn't going to rally on this, you could say that crypto truly was dead. Very much not dead. And I think there's a dovetail potentially with Jackson hole next week and that's another thing I need to get to in this whole conversation. But gold, obviously, finding strong support on this, this is very bearish the dollar. Very bullish hard assets when you have signals of a new type of intervention to prevent yields from doing what they want to do. That's the best thing you can imagine for gold. It is dealing gold in spot gold and dollar terms with this 4,500 area. I wasn't able to punch through on the first try there that is around the 200 day moving average. If it does get through, I imagine it might want to punch up higher into the 5,000 plus area once again. Now, structurally speaking, what do we need? What does the treasury need to, you know, this buyback announcement, it's a piddling amount relative to the total outstanding US debt. They've already frozen the size of issuance in nominal terms for coupon bonds, which is already meaning the real load of coupon bonds, continues to drop as a percentage of US GDP because obviously nominal GDP is growing a pace. So they're financing more and more and more and more in the T bills, the very front end of the yield curve. What does the US treasury need for stability for stable finances? Well, the best thing would be to cut the damn deficits that are so massive. But that aside, they need to run policy rates that are far below inflation and not really doing that right now. So Q, the Worsh Fed, Q Kevin Worsh, you know, talks tough, says a lot about, you know, credibility on inflation fighting, they need to reduce the Fed's balance sheet, by the way, complete nonsense, total cognitive dissidents, that whole idea together with what's the US treasury is doing and running his massive deficits, etc. How does the Fed maintain credibility? Well, it needs to come up with some policy or some outlook, acrobatics or policy acrobatics to explain away, you know, having a lower policy rate than it has now. So is Kevin Worsh doing that? He wasn't put into the Fed to be super tough on raising front end interest rates. I really don't believe that. But how, what is the discovery process? How willing and how boldly and how quickly would this Fed be in pursuing? The rates needed for a fiscal dominance era, fiscal dominance era. What do I mean by that? It is the US treasury's ability to continue to fund these massive deficits, which with US servicing debt servicing costs at record percentages of GDP, it needs to be much lower. Will it be the discoveries from these task forces? Will it be to redefine the inflation target to 3 percent instead of 2 percent? Will it be to imagine a bit green span style that while we've got this amazing new technology called AI, it's going to create a productivity revolution. And therefore, disinflation is actually eventually going to be the greater risk. I don't know, but it certainly sets up suddenly Jackson Hole in a very different light. And then the grand irony is, this is an urgent question that the market wants answered. And then we get the hilarious irony of an FOMC minutes last night, which is all about the FOMC wrangling about, do we need to hike and then the risks of inflation, etc. When I just talked about the priority is for the treasury in an era of fiscal dominance to get that rate lower relative to inflation. And then the other irony being that the Jackson Hole main topic is what is the title? Civil innovation, implementing, or implications, I should say, for payments and policy. That is all about this whole issue of the stablecoin infrastructure. And whether the US can harness this as sort of the next way to extend US dollar hegemony out over the horizon from its prior basing on, you know, the petrodollar and reserve, as the reserve currency and asset markets in general, especially surrounding the originally the petrodollar in the 70s and then later it just financed your market backing in general. Not really what the focus is on the deficit side of things, but of course it would help to finance the deficit if everybody wants to own stablecoins instead of their local currency or local debt. So really curious about that. And then we have the reaction in the US treasury market, let's talk through that a little bit. Obviously the longest bonds fell the most. That's where we'd seen the biggest rise and that is the, you know, the pressure point that this new buyback announcement was weighing on the most. We were down was at nine 10 basis points at some point in the US 30 year. That's crept back higher back above 5.2% the all time high there and this little run up was a bit above 5.33%. The 10 year was down much less and in fact it's kind of creeping and cutting that that move in half as we're speaking. I guess speaks to that concern and, you know, is this enough? This is just a desperation and they don't have the amounts to throw at the market. We all need to flesh our treasuries. It would be the, you know, the, the fear trade there. And then at the front end of the curve are basically not impacted. And in fact, you see yields rising a little bit this morning. I think it, this got the, maybe the consensus treasury trade and the yield curve trade of late the wrong way around, which was you need to be short the long end and you need to be long the short end. Maybe long the short end is going to remain as a key trade, especially if the worst Fed comes in as dovish as they might. But that whole structural trade of thinking we're going to see continued steepening via higher long rates just got it in the teeth. So yeah, that's I think explaining the reaction function. And I'm super willing with maximum trying to express maximum humility here to just see how things develop one day at a time. I think the, this is the most titanic of all issues facing our financial system or these US deficits and how the treasury and the Fed dance around all the issues I've just discussed here. And what it means for which markets could benefit and which markets would punish the most by whatever policy choice they take. So we'll take it a day to time. We'll try to stay humble. I think the one thing it's important is it didn't serve as an immediate big risk on catalyst. And I think that's a loud signal as well that it did not do that. The market is not reading this as QE immediately. So I would take that as an important as an important part of this NASDAQ was off slightly S&P up slightly. The median stock up quite big, a full 1% if we look to the S&P 500 equal weight, very interesting on that account. Maybe it's that hope that with lower long yields, just the median stock out there with this dividend yield looks more attractive. We're not worried about the long duration part of lower quality stocks, et cetera. I don't know. Russell 2000 up half a percent and the, and the semiconductor is doing a bit poorly down 2%. Big moves and just individual stocks yesterday, by the way, looking at the leaders and Lackards charts of the S&P 500, there was a heck of a lot of 4% to 5% plus movers. Going away tangentially for away from the immediate impacts here on in terms of the Fed or sorry, the Treasury announcement, but down to 176% yesterday. Be careful what you read into that. I am certainly no expert, but there was a massive short out on that stock, especially in terms of the daily liquidity. So this big announcement that Moderna had about a late stage success, supposedly in one of its drugs, this drug apparently treating melanoma patients and helping to, the hope is with this medication, to prevent, completely prevent the recurrence of the melanoma in an individual that has been treated. The tricky bit here is that to treat a patient, they have to go to each individual patient, sample their tumors, find the RNA sequences within that tumor, and then customize the drug to that version of the cancer they have. So it's customized for you personally. I have to imagine it's a bit costly and who pays for it could be a question and an insurance and who can afford it, etc. But just need to mention the story. It's pretty crazy when a stock of that size goes up 176% in one day. That results throughout yesterday, I think they considered to be quite positive. There was actually initially a sell-off and then the stock closed in a new local cycle high there. So it decided to read it as positive by the end of the day. Today we have Walmart before the open, really looking forward to that one for an anecdotal read on the US consumer. So stay tuned for that. Okay, then I think just rounding out a little bit, the currency space, I found it a bit interesting that I find it a bit interesting that Eurostone continues to crawl into this key resistance area, 85/80 or so. This honeymoon period for Burnham seems to be in the rear room here and as well if you look at the UK yield structure, this is certainly an issue that the UK is plagued by as well. Not to the same degree, perhaps as France, but Europe is managing to escape the focus for now because France is, of course, rolled into the full single euro or into the Eurostone to some degree, shielded by Germany, although we'll continue to watch the spreads there. There was a week Australian employment report in terms of the unemployment rate going up to a new local cycle high to a 4.5% versus 4.4% expected. And that was despite a small drop in the participation rate. So that wasn't red as kindly, but I think if this hard asset trade continues to engage, there's some support for the Aussie and at least the crosses here. There was a 20 year auction interesting yesterday as well after the buyback announcement in the US that is Treasury Notes and it saw about a five, I think the lowest demand ratios in about five auctions out of range, but just a bit lower than the previous four, maybe just this whole, what the heck is going on, is this a sign of panic people pulling their engagement a little bit on a day when this actually was announced. We'll have to see how the follow-up auctions go in the US. Yeah, lots to consider. We'll take it one day at a time for now, stay careful out there. That's a wrap and I'll be back tomorrow with the next Saxon Market Co. This has been the Saxo Market Call podcast. Thanks for joining today's episode. We're always happy for your feedback and questions of all kinds. To reach out, you can drop us an email at [email protected], that's [email protected]. Saxo. Serious trading worldwide.