The US Dollar Index (DXY) experienced significant selling pressure on Wednesday, falling to around 98.86, its lowest point since late May, and was down 0.80% for the day. This decline was primarily triggered by the US Treasury Department's decision to expand its buyback operations for longer-dated government securities, which led to a sharp fall in longer-term US Treasury yields.
The Treasury announced that it would at least double the maximum size of its liquidity-support buybacks for the 10-to-20-year and 20-to-30-year maturity sectors, increasing them from $2 billion to at least $4 billion per operation. This move, which will take effect from September 9 through November 4, aims to provide greater liquidity in these market segments. Following the announcement, long-dated Treasury bonds rose, and yields fell, with the benchmark 10-year yield trading around 4.64%, down more than 5 basis points, and the 30-year yield dropping nearly 9 basis points to 5.19%. This is a notable reversal as the 30-year yield had climbed above 5.30% just the day before, its highest level since 2007.
The falling Treasury yields made US assets less attractive, intensifying the pressure on the US Dollar. This comes amidst fading expectations of an imminent Federal Reserve interest-rate hike, following recent weak US economic data. However, the inflation outlook remains clouded by the energy shock from the Middle East conflict, preventing traders from entirely ruling out a Fed hike later in the year.
Analysts had mixed reactions to the Treasury's move. While some, like Krishna Guha of Evercore ISI, suggested it could help curb short-covering and deter future short positions, they also noted it doesn't fundamentally alter the need to finance substantial government deficits and "hyperscaler" debt. Others, like Joe Brusuelas, chief economist at RSM, expressed concern that the attempt to control yields could complicate the Federal Reserve's efforts to manage inflation, potentially suppressing yields artificially and making price stability harder to achieve. Mohamed El-Erian described the purchases as "small in both absolute terms and relative to net issuance," suggesting it's more about "yield curve control."
