Payden & Rygel: US asset purchase programs have short-lived impact
This week, Treasury Secretary Scott Bessent announced that the U.S. Treasury will 'at least double' its 20- to 30-year Treasury buyback cap from the current $2 billion per operation. Yields on 30-year Treasury bonds rallied more than 10 basis points on the news. However, we think the impact might be short-lived.
First, with long-end yields well above the Fed funds rate, it makes sense for the Treasury to borrow at a cheaper cost by issuing more T-bills.
Second, rather than being a stimulus program like quantitative easing (QE), which involved the Fed creating new reserves to buy longer-end assets, the Treasury will still have to issue the same dollar amount of debt to finance federal borrowing, just as different maturities.
And third, but the Treasury is removing duration from the market, just like QE, you say? After adjusting for duration, the Fed's QE programs were much larger. And the yield impact? Inflation, growth, and the size of the deficit will matter more for long-end rates than small changes in the Treasury debt profile.
Ultimately, to keep a lid on rates, policymakers need to rein in in inflation, cut government spending, raise revenues, or ... all three. Until that happens. Treasury will still need to finance a budget deficit that's 6% of GDP ... at elevated yields.
