The Exchange 8/19/26

**SPEAKER_1** (0:00)
This episode is brought to you by Schwab Market Update, an original podcast from Charles Schwab. Join host Keith Lansford for this information packed daily market preview delivered in 10 minutes or less, including projected stock updates, monetary policy decisions, and key results and statistics that may impact your trading. Download the latest episode and subscribe at schwab.com/marketupdatepodcast or find Schwab Market Update wherever you get your podcasts.

**SPEAKER_2** (0:29)
Something amazing is happening when power outages strike.
Teams are powering through them. That's because CDW Solutions Architects are building more resilient IT and electrical infrastructures with Schneider Electric. With EcoCare Remote Monitoring Services and 24-7 support, your organization can do more than keep the lights on. Schneider Electric and CDW make amazing happen. Learn more at cdw.com/schneiderelectric.

**Kelly Evans** (1:03)
Thank you very much, Scott. Stocks are rising after Treasury says it will double the size of its debt buybacks and is Biotech the new AI trade. I'm Kelly Evans and welcome to The Exchange. All three major averages are now rising. Nasdaq was down earlier after a surprise move by the Treasury today to double the size of its buybacks of 10 to 30 year debt. That has yields down, but it will also make the US more sensitive to changes in short-term rates. We'll talk about that with the 20-year auction happening now. Plus, the Nasdaq underperforming today has hot trades like Neviest, Seagate, Asterra and even CrowdStrike take a breather, while the small caps are once again leading the way.
Biotech stocks are soaring. Moderna at one point up 150 percent today. After its skin cancer vaccine with Merck show success in the late stage trial, Merck up 11 percent, also helping the Dow will have more details on that big story ahead. But let's begin with this announcement by Treasury Secretary Scott Besant, that from September 9th through November 4th of this year, Treasury will double the size of its longer dated debt purchases to $4 billion per operation. What they buy will effectively be replaced with shorter term debt like Treasury bills, making this Treasury's version of a so-called operation twist. The move is meant to bring down longer term interest rates. After the 30-year yield hit a multi-decade high of 5.33 percent yesterday, these repurchases are a move that was first introduced by Janet Yellen back in 2024, and at the time was criticized by the likes of Nouriel Roubini and Stephen Myron, who became President Trump's key economic policy advisor shortly thereafter. At the time, they warned that Yellen's move was equivalent to cutting interest rates by, or the Fed funds rate, I should say, by a full point. Let's bring in Barry Knapp, Director of Research at Ironsides Macroeconomics. For today's opening exchange, Barry, how do you characterize this? What impact will it have and is it irresponsible?

**Barry Knapp** (3:01)
Well, I would not call it QE, for sure. I would, I think it's fair to call it an operation twist. The first operation twist actually occurred with the JFK administration, and it was primarily the Treasury with a little support from the Fed. Can't say I'm surprised by this. I was discussing this with some former Lehman colleagues earlier this week, and we were talking about a couple of actions that could be taken.
To stabilize the back end of the market. One of which I still think is probable as we get into the fall, which would be, we know that we've had a 6 to 1 vote by the board of the FOMC to approve Vice Chair for Supervision Bowman's new capital plan, right? That'll reduce the amount of capital that banks are required to hold.
We're thinking that you may very well get the Fed suggesting to the banks, it's sort of Greenspan-esque, much like he was encouraging them to lend money in the early 90s. We think you should be buying some treasuries. Now, the changes in capital rules and eventually the liquidity requirements could increase potential bank demand for not long-term securities, somewhere in the three to seven year part of the curve, by as much as four to six trillion dollars. So you may very well have a source of demand that the Fed could play a role in by through lowering capital requirements and then encouraging banks to lend money, not just to the private sector, but also to the US government that could help stabilize the market as well. So being irresponsible, I don't know, it's a little tougher call. I think it was more irresponsible to ramp up government spending to 23 or 25 percent of GDP and put us in this predicament. So a little reluctant to attribute blame here.

**Kelly Evans** (5:03)
To be clear, there's a lot of market participants who are now saying to buy long-term bonds at these levels. And let's hope, I mean, certainly let's hope that that is the call. But Mike Darda was writing about this yesterday and saying, hey, we are actually slowly making progress on the deficit. The Honjan Jigian earlier this week, he said, especially if we got closer to 5 percent on the 10 year, he'd be a buyer. So I want to put the market call to one side. It may well be the case that, you know, that they're a buy here and that's fine. I mean, but it's obvious we're papering over the real problems. And we're now pulling every tool we have out of the toolkit to deal with the fact that we can't deal with the deficit. We can't fix this problem. And the worse it gets, and now we're opening ourselves more to moves in short-term interest rates. Maybe they go down and that's great. Maybe they go up.