The US Treasury announced on Wednesday it will at least double the size of its government debt repurchases to steady a bond market that has come under increasing inflationary pressure.
The latest move from Treasury Secretary Scott Bessent comes as long-term yields reached their highest level in 20 years this week, with investors concerned over the expiry of a two-month ceasefire between the US and Iran.
Treasury said it would focus on the 10-20 year and 20-30 year sectors, with the government “at least” doubling the size of each operation from $2 billion to $4 billion. Treasury said the change is effective from September 9 and will run until November 4.
It said the move “reflects Treasury’s desire to provide greater liquidity support in longer-dated nominal sectors where there is consistent strong sponsorship from market participants”.
Inflation has proven to be persistent during the Iran war. Energy supply disruptions due to the effective closure of the Strait of Hormuz have been reflected in a volatility in oil prices, with Brent crude trading about 25 per cent higher than its pre-war levels.
Rising costs for artificial intelligence build-up and a weak electrical grid are also increasing price pressures.
Government data released last week showed US inflation dropped slightly from 3.5 per cent to 3.4 per cent in July, although this is still above the Fed's 2 per cent target.
Also on Wednesday, minutes from the Federal Reserve's July 28-29 meeting showed that many officials on the central bank's policy committee indicated higher interest rates would be needed if inflation does not decline.
Fed officials at the time voted nine to three in favour of holding rates steady between 3.50 and 3.75 per cent, a move mirrored by the UAE Central Bank, because of its currency's peg to the dollar.
“Most participants anticipated that inflation would step down over the rest of the year as the effects of tariffs and earlier energy price increases wane, but many participants noted the possibility that inflation might be more persistently elevated,” the minutes read.
In Fed terms, the word “many” is used to describe a group that consists of nearly half of the 19-person committee, including the seven non-voting members.
Fed decisions on short-term rates influence how other bond yields behave, which in turn affect borrowing costs for consumers and businesses.
“They’re gauging themselves … how restrictive the Treasury curve should be. And that, I think, has been a useful development,” Fed chairman Kevin Warsh told reporters after the central bank's July 29 decision.
“We don’t endorse any particular market move, but it also suggests we observe them with keen interest.”
However, investors reacted poorly to Mr Warsh's media conference, where he failed to explain why the Fed chose to leave rates unchanged and how the central bank might act when it next meets in September.
“The Treasury curve has been steepening since last month’s Federal Open Market Committee decision as investors reduce odds of Fed rate hikes and contend with increasing supply risks,” John Canavan, lead analyst at Oxford Economics, wrote in a note.
Mr Warsh's next public appearance will be at the Fed's annual gathering in Jackson Hole, Wyoming. The Fed chairman's keynote speech is often seen as a glimpse into how the leader of the world's most significant central bank might reset the direction for monetary policy.
He said last month he has not made a decision whether his address will be a "big-picture speech" or a set-up for the Fed's outlook this year.
