Treasury buyback and inflation data to test US bond market next week
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US bond investors face a potentially turbulent week as the Treasury details an expanded buyback on Wednesday and August inflation data lands Friday. The two events will shape expectations for Federal Reserve rate policy and long-term borrowing costs. Traders are bracing for swings at both ends of the yield curve after a volatile holiday-shortened week.
Key Facts
- The Treasury will announce details of a bond buyback on Wednesday, with the operation set for Thursday and the size expected to be at least double the previous $2 billion maximum.
- August inflation data will be released on Friday, and Fed Chair Kevin Warsh has said it will be crucial in deciding whether to hike rates later this month.
- The 30-year Treasury yield stood near 5.25% as of Friday, close to its highest level since 2007.
- US debt has reached $40 trillion, and Brookings Institution senior fellow Robin Brooks called the situation an 'all-hands-on-deck' moment for long-term yields.
Treasury Buyback Expansion
The Treasury's buyback program was expanded outside its regular quarterly announcement schedule, surprising investors. The department said it would 'at least double' the size of operations from the previous $2 billion, with multiples of three to five considered possible. A buyback larger than $4 billion could spur a bond rally, according to traders.
Inflation Data and Fed Policy
Friday's inflation report will be pivotal for the Federal Reserve's rate decision later this month. Fed Chair Kevin Warsh and colleagues have indicated the data will determine whether the central bank hikes interest rates. Tim Musial, head of fixed income at CIBC Private Wealth, called the jobs report 'the appetizer' and the Sept. 11 inflation data 'the main course.'
Yield Curve and Market Pressure
On Friday, the yield curve flattened as short-term yields rose and long bonds held steady after August job growth topped forecasts. Traders increased bets on a Fed hike this month, though uncertainty over Treasury and Fed policy limited the moves. Robin Brooks of Brookings noted that weak economic data has failed to bring down long-term yields, signaling weaker demand for Treasury debt than apparent. Brooks also pointed to the intensifying US-Iran conflict and rising oil prices as worsening the inflation outlook.
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