The Treasury Department’s move to calm government debt markets is generating unintended consequences, with investors increasingly pricing in higher inflation expectations.
Breakeven rates, a market-based measure comparing Treasury yields to inflation-protected securities, climbed sharply this week, hitting their highest levels in more than two months across the curve.
The 10-year breakeven rate rose to 2.34% on Thursday, its highest since June 10, while five-year breakevens reached their highest point since June 16.
The moves followed a Treasury Department announcement that it would at least double its typical $2 billion debt buyback programme, a routine operation first begun in 2024 to support longer-dated government debt markets.
Treasury Secretary Scott Bessent insisted the buyback expansion was not an attempt to push yields lower, even as 10- and 30-year Treasurys had recently hit levels not seen since before the 2008 global financial crisis.
“The background here is very unforgiving at the moment. There’s this cocktail of concerns that has risen up,” said Van Hesser, chief strategist at KBRA, a credit and bond rating agency.
Hesser added that traders pricing in higher inflation “fits into the backdrop where people are concerned about inflation, and that continues to lean on the market,” describing the flare-ups as recurring patterns that “manifest themselves in markets.”
Long-dated Treasury yields initially fell on the day of the buyback announcement but quickly rebounded, with the 10-year benchmark standing at 4.73% in early afternoon trading on Friday, above pre-announcement levels.
The 30-year yield climbed 3.6 basis points to 5.27%, while shorter-dated yields also rose, as Treasury is required to offset long-dated buybacks by issuing shorter-term bills.
The dollar continued to weaken alongside rising yields, losing nearly 0.9% over the course of the week, a trend that analysts linked to expectations of looser Federal Reserve policy.
Thierry Wizman, Macquarie Group’s global foreign exchange and rates strategist, wrote that the dollar weakness “may be the result of ‘read-through’ of the Treasury announcement to the prospect of looser Fed policies.”
Wizman further noted that “upon the announcement of the buyback increase and the ‘signaling effect’ it mustered, the 10-year breakeven rose by about 6-7 bps — not insignificant,” adding that “something about the announcement was ‘inflationary.'”
The market turbulence raises the stakes for Fed Chairman Kevin Warsh, who is scheduled to deliver a keynote address on August 28 at the central bank’s annual symposium in Jackson Hole, Wyoming.
Wizman warned that “were Warsh to signal that he would stay ‘dovish’ indefinitely, it could be self-defeating for him and the Treasury, since inflation breakevens would rise further, perhaps undoing the stability in the nominal long-term yields that Scott Bessent is trying to achieve.”
Not all market participants view the yield moves as alarming, with David Zervos, chief market strategist at Jefferies, pointing out that the 10-year note is in “one of the tightest ranges” it has seen in 20 years, adding, “It’s not running away from anybody.”
Zervos also argued that “what we’re seeing is a different kind of Treasury secretary, someone who’s willing to come in and be more tactical, and that is something new for the market, and the market’s going to have to adjust to that.”
Hesser shared a similarly measured view, describing current yield levels as more consistent with historical norms following a prolonged period of artificially suppressed rates.
“A 4 to 5% 10-year is a very constructive level of rates in a thriving economy,” Hesser said, adding that such a rate “allows interest rates to do what interest rates are supposed to do, and that is moderate capital flows through the economy.”