Treasury's $4B buyback blitz may backfire, JPMorgan warns

The U.S. Treasury doubled buybacks of longer-dated bonds to at least $4 billion per operation, pulling the 30-year yield off a 2007-high 5.34 percent, but JPMorgan warns the move may backfire.

"The buyback program does not change the fiscal arithmetic," said Jay Barry, a strategist at JPMorgan, who with colleague Jason Hunter called the expanded operations unnecessary and warned they could end up driving yields higher.

The 30-year yield retreated to around 5.18 percent after touching 5.34 percent, its highest since 2007, while the 10-year fell 6 basis points to 4.647 percent. Total federal debt has crossed $40 trillion, with more than $32 trillion held by the public, and the Treasury plans to borrow $739 billion in the July-September quarter and another $628 billion in the final three months.

The buybacks, capped at roughly $83 billion through early November, are small against Washington's financing needs, so the program eases liquidity stress without addressing the deficit that keeps generating supply — leaving importers of U.S. duration such as South Korea exposed to higher term premiums.

The Treasury said it would raise individual buybacks in the 10-to-20-year and 20-to-30-year sectors to at least $4 billion from $2 billion, with the higher limits applying from Sept. 9 through Nov. 4. The department cited "consistent strong sponsorship" and a significant volume of high-quality offers in longer-dated operations.

Maximum repurchases between early August and early November total about $83 billion against more than $32 trillion of publicly held U.S. debt, and the gap widens when measured against Washington's borrowing needs. Citi's Dan Gottlander said the expanded operations could have a significant effect on longer maturities but noted the program "does not change deficits," leaving the government to finance its borrowing elsewhere along the curve.

Term Premiums Climb to 12-Year High

The selloff is not confined to the United States. Japanese long-term yields are approaching multi-decade highs while borrowing costs in Germany and France have also risen sharply, increasing competition for global fixed-income capital. The New York Fed's estimate of the U.S. 10-year term premium has climbed to around 80 basis points, close to a 12-year high, suggesting investors demand greater compensation for holding long-term debt beyond expectations for the Federal Reserve's policy rate.

Foreign demand has also become less certain, with Treasury holdings by Japan, Britain and China declining in June as higher yields elsewhere and changing portfolio incentives make it less certain that overseas buyers will absorb new U.S. issuance at existing prices.

The Congressional Budget Office projects publicly held debt will rise from around 101 percent of gross domestic product this year to 120 percent by 2036. The $40 trillion threshold is not itself a black swan because the debt trajectory is widely known, but the growing stock could amplify another shock if renewed inflation, higher oil prices, weak Treasury auctions or softer foreign demand force investors to demand materially higher long-term yields.

Korea Imports U.S. Fiscal Risk

For South Korea, the clearest transmission channel is the bond market, because higher global term premiums can push up domestic long-term borrowing costs even without a change in the Bank of Korea's policy rate. That sensitivity was evident on Aug. 18, when the three-year Korean government bond yield rose 6.6 basis points to 3.862 percent while the 10-year jumped 10.2 basis points to 4.415 percent, the 20-year gained 11.7 basis points to 4.675 percent and the 30-year rose 10.8 basis points to 4.777 percent.

The larger moves at the long end showed how a U.S. duration and fiscal shock can be transmitted into Korean borrowing costs independently of expectations for the BOK, potentially tightening financing conditions even if policymakers in Seoul do not raise the base rate further.

The currency channel is less straightforward. Higher U.S. yields driven by stronger growth or Fed tightening typically support the dollar, while yields rising because investors demand a larger fiscal-risk premium can coincide with dollar weakness. A more severe Treasury-market disruption could produce the opposite response, however, if global risk aversion triggers demand for dollar liquidity and puts renewed downward pressure on the won.

Equities face a similar transmission channel through discount rates, as persistently higher long-term yields reduce the present value of future earnings and put particular pressure on technology and other growth stocks. South Korea's chip-heavy equity market is therefore exposed to renewed increases in global long-term rates even when domestic earnings remain strong.

Washington can buy time with larger Treasury buybacks and currency intervention, but it cannot buy back the deficit. If the center of gravity in long-term yields continues shifting from Fed policy toward fiscal supply and term premiums, Korea may increasingly find itself importing U.S. fiscal risk as well as U.S. monetary policy.

This article is for informational purposes only and does not constitute investment advice.