US Dollar: Treasury buybacks raise fiscal questions – BBH

Brown Brothers Harriman (BBH) notes that US long-term Treasury yields have retraced most of their decline following the Treasury’s expanded buyback announcement, while the US Dollar (USD) remains under pressure. The bank argues that although the buybacks should improve liquidity and flatten the yield curve, their timing risks creating the perception that the Treasury is trying to manage long-term borrowing costs, potentially undermining US fiscal credibility and weighing on the Dollar.

Treasury actions weigh on Dollar

"US long-term Treasury yields have retraced most of yesterday’s drop triggered by the US Treasury’s buyback announcement, while USD has extended its decline."

"The Treasury buyback is essentially a debt-management swap. The Treasury buys and retires older, less liquid bonds (off-the-run) in favor of new, more liquid debt (on-the-run) issued through its regular auction. Total debt stays the same but its composition shifts toward newer, more liquid securities."

"The additional buyback size will probably be financed at the margin through greater bill issuance. More front-end supply combined with long-bond purchases, point to a flatter yield curve. However, the impact should be limited given the small size of the operations relative to the overall Treasury market ($31.4 trillion)."

"The timing of the Treasury’s buyback announcement sends a less comfortable message. The Treasury expanded the long-end buybacks shortly after the 30-year Treasury yield reached its highest level since 2007. This suggests that heavy debt supply (public and private) is beginning to strain long-end liquidity and the Treasury is increasingly uncomfortable with rising borrowing costs."

"Bottom line, the perception the Treasury is managing yields rather than liquidity undermines US fiscal credibility and is a drag on USD."