(Aug 20): Wall Street staged a rebound after the Treasury said it plans to boost buy-backs of longer-dated bonds, a signal the US wants to lower borrowing costs after yields hit multi-decade highs.

A rally in 30-year bonds drove yields down by 10 basis points to 5.18%. Most shares in the S&P 500 rose, though chipmakers fell. The dollar hit a three-month low. Bitcoin jumped as President Donald Trump pressed Congress to pass a key crypto bill as the White House hosted industry executives.

Just two weeks after releasing its planned schedule for buy-backs this quarter, the Treasury said it’s “increasing, by at least double, the size of liquidity support buy-back operations” for securities dated from the 10-year to the 30-year sector.

“This is more of a band-aid than a panacea,” said Lawrence Gillum at LPL Financial. “But it is a reminder that the Treasury Department is paying attention and will do whatever it can to keep yields from getting too high too quickly.”

While the Treasury didn’t indicate how the operations would be paid for, it typically relies on issuance of bills for its fluctuating funding needs. If officials are in effect replacing longer-dated debt with short-term securities, the manoeuvre amounts to a version of the Federal Reserve’s (Fed) “Operation Twist.”

Those shorter tenors are more influenced by monetary policy decisions rather than fiscal dynamics, and they shield Washington from being punished imminently for having sustained outsized budget deficits for almost three decades, according to Jose Torres at Interactive Brokers.

Bonds had been jolted in recent days, with investors demanding more compensation to protect against inflation risks and rising government debt. The move was also fueled by corporate borrowing to fund the artificial-intelligence boom and waning demand from traditional buyers of long-dated maturities.

“The intervention can help crowd in potential buyers tempted by the prior run-up in yields and force some near-term short-covering, while discouraging investors from going max short in the future for fear of being ambushed again,” said Krishna Guha at Evercore.

But the operation changes almost nothing in terms of fundamentals, and the increased size of the operations is modest relative to the flows in the Treasury market, he added.

Total US public debt surpassed US$40 trillion for the first time, and has now surged by a third in less than five years, as US lawmakers continue to shrug off calls to contend with historically wide fiscal deficits.

Traders also sifted through minutes of the latest Fed policy meeting. The record showed several officials favoured a rate hike last month and many indicated that tightening would be necessary if inflation didn’t decline.

Uploaded by Isabelle Francis