ORLANDO, Florida (Aug 19): Long-dated US bond yields and the dollar tumbled on Wednesday after the US Treasury said it would double the amount of planned bond buy-backs in the coming months. As a result of the fall in market-based rates and the dollar, US stocks climbed while gold and bitcoin rose sharply.

In my column today, I analyse whether the massive increase in AI-driven debt issuance from the ​US hyperscalers is responsible for the recent surge in US bond yields and risk premium. Is the corporate bond market "crowding out" investor demand for Treasuries?

The US Treasury's announcement on Wednesday that it ​will at least double the size of long-dated bond buy-backs for a couple of months had an immediate impact — long bond yields fell as much as 10 basis points, the yield curve flattened, ​and the dollar tumbled. Zoom out, however, and we can see that the numbers involved are small, the operation is temporary, and it doesn't change the average maturity of outstanding debt. It's not QE, and the long-term impact will likely be minimal.

But the optics are interesting. This is the second time in a few weeks (after co-ordinated yen intervention with Japan) that the Treasury has been forced to act — or be seen to be acting — to cool ​the rise in US bond yields. The operation ends just days before the midterm elections. Also, it could have been announced as part of the quarterly refunding only two weeks ago, but ​wasn't. Since then yields and the term premium have spiked significantly. The Warsh Fed wants to be less active in markets. Is the Bessent Treasury going in the opposite direction?

Minutes of the Fed's ‌July 28-29 ⁠policy meeting were released on Wednesday. They show that a growing number of officials are increasingly worried about the persistence of elevated price pressures and the inflation outlook. The three weeks since the 9-3 vote to keep rates on hold have been action-packed — energy prices, especially diesel, are popping higher again, but inflation and employment data have been on the soft side; long bond yields have surged to multi-year highs, but Treasury is taking measures.

The minutes suggest the centre of gravity on the FOMC is shifting in a more hawkish direction. "Several" members favored raising rates by 25 bps at the ​meeting, and "many" said borrowing costs will have to ​rise if inflation doesn't come back to ⁠the Fed's 2% target. That was before the July inflation and payrolls data though, which appear to have taken a hike in September off the table. It might still be a close call.

One consequence of the dollar's slide following the US Treasury's surprise bond buy-back announcement is the ​uncertainty it suddenly casts around the FX carry trade, especially the Japanese yen and Swiss franc. Short yen positions had already gotten blitzed ​by the recent US-Japan intervention — ⁠the CFTC net short yen position had its biggest one-week pullback on record — and this is likely to encourage more short covering.

The short Swiss franc position isn't quite as extreme, but it's still historically large. The Swiss franc on Wednesday surged nearly 2% against the dollar, its biggest rise since January and among the biggest in recent years. If the US, Japan and others are becoming more active in ⁠FX and bond ​markets, what is the obvious carry trade funding currency of choice now?

Uploaded by Siow Chen Ming