We get jobless claims and a look at Philadelphia manufacturing activity today, but mortgage rates will likely be driven more by the market’s continued reaction to Wednesday’s surprise Treasury buyback announcement.
- The move sent yields tumbling, with the 30-year Treasury yield plunging more than 10 basis points and the 10-year falling more than 6 basis points. Yields are giving back a small portion of those declines this morning.
What’s happening: The Wall Street Journal’s Sam Goldfarb, Brian Schwartz and Krystal Hur called Treasury Secretary Scott Bessent’s latest maneuver his “most radical yet.” While Treasury presented the expanded buyback program as a technical move designed to improve bond-market liquidity, the Journal reports that some of Bessent’s allies believe lowering long-term yields was also part of the objective.
- George Goncalves, head of U.S. macro strategy at MUFG Securities, offered a similar assessment to the New York Times: “Long-term rates are the focus…That is clearly the case.”
The risk: Trying to push yields lower isn’t necessarily a free lunch. The Journal’s Greg Ip points out that U.S. Treasuries have historically enjoyed a “safety premium” because investors viewed them as the world’s premier safe-haven asset. That confidence helped provide the U.S. government, and ultimately American consumers, with lower borrowing costs.
- But Ip argues Treasuries have recently begun behaving differently. Their yields aren’t as low relative to competing assets, and during periods of stress they haven’t consistently rallied like the safe haven they once were.
Another concern: Robin Brooks argues that deliberately suppressing long-term yields could simply move the pressure somewhere else. Brooks wrote Thursday that the Treasury’s action is the clearest indication yet that the U.S. could be moving toward the same problem Japan has faced.
- If markets believe yields are being artificially restrained despite fiscal risks, investors may instead demand compensation by selling the dollar.
- In other words, attempts to prevent a debt-market problem could eventually create a currency problem.
But some perspective is needed: The Wall Street Journal Editorial Board recently made an important point: interest rates returning to levels last seen before the 2008 financial crisis doesn’t automatically constitute a crisis.
- The extraordinarily low rates of the past two decades were historically unusual. From that perspective, today’s higher yields could simply represent an “unwinding of abnormal conditions.”
The bottom line: Too many traders have spent their entire careers in the post-2008 world of extraordinarily low interest rates. Higher long-term yields aren’t necessarily evidence that something is broken. But if policymakers increasingly treat every rise in yields as a problem requiring intervention, they risk convincing investors that there really is something to worry about, potentially turning that fear into a self-fulfilling prophecy.