By Mehnaz Yasmin
Aug 28 (Reuters) – Aggressive efforts by the U.S. Treasury to cap long-end borrowing costs below 5.30% could ultimately weigh on the dollar, Citigroup’s global head of macro and asset allocation strategy Dirk Willer said, as investors may look beyond Treasuries for assets that offer protection against fiscal deterioration.
Instead, “investors might buy bonds that aren’t capped by central banks, creating some negative dollar impetus,” Willer told the Reuters Global Markets Forum on Thursday.
Citi had been underweight Treasuries but dropped that position after the Treasury announcement, while adding gold and staying short the dollar, he said.
The U.S. Treasury’s move last week to support long-duration bonds by doubling buyback sizes did little to alleviate concerns about global duration risk. That further raises interest rate risk, which could help explain why the Treasury “term premium” — the extra compensation investors demand for holding long-maturity debt rather than rolling over shorter-dated paper — is rising.
A higher term premium pushes up long-term yields, raising borrowing costs across the economy, with the 30-year Treasury serving as a key benchmark for mortgages, corporate borrowing and other long-term financing.
Burgeoning government debt, as the U.S. runs one of the largest deficits on record, along with elevated inflation and a surge in long-duration debt issuance by AI hyperscalers, have added to pressure on the long end. The 30-year Treasury yield soared to 5.327% last week, its highest since 2007.
Willer noted that it isn’t just direct intervention by the Treasury or the Federal Reserve that creates demand for Treasuries. Other measures, such as increasing buybacks, phasing out the 20-year bond, or regulatory changes, could be used to encourage banks or other market participants to increase Treasury holdings.
“In proper bond crises, there are often market-microstructure issues that policymakers can address,” he said. “Ultimately the question (is) how many bullets do they have, and when do they run out? We think they still have a fair amount of bullets, while others think they’re close to running out.”
BOND-OIS CONVERGENCE: THE FISCAL RISK TEST
In the U.S., 30-year Treasury yields have risen broadly in tandem with matched overnight index swap (OIS), leaving the bond-OIS spread relatively contained and suggesting the selloff has been driven more by a repricing of rates than Treasury-specific risk.
“If you look at what drove the sell-off, asset-swap spreads were quite well behaved. And that’s really where fiscal problems should show up most clearly,” Citi’s Willer said.
That leaves open the possibility that the global selloff in 30-year bonds has been driven more by a repricing of underlying rates than by a deterioration in the creditworthiness or liquidity of sovereign bonds.
“But positioning for bonds to outperform swaps closer to November is something to keep in mind,” Willer added.
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(Reporting by Mehnaz Yasmin in Bengaluru; Editing by Divya Chowdhury and Nick Zieminski)
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