The Market’s $40T Question: Can Treasury Keep Yields Under Control?

**Matt Milligan** (0:00)
On Wednesday, August 19th, the United States Treasury announced it will double its buybacks of long-term government bonds to cap the long end of the yield curve. Gold jumped 3% to 4,500 an ounce, Bitcoin rose more than 5%, and the 30-year Treasury yield fell back from its highest level in nearly two decades. I'm Matt Milligan, producer, filling in for David Lin today.
The buyback relief lasted one day. On Thursday of this week, the bond market took it all back, and the Dow fell more than 700 points. And just this morning, the 30-year yield now sits just under 5.3%, as if the announcement never happened. Gold is holding near 4,600, a three-month high, and Bitcoin trades at around 77,000, up more than 22% on the week. Consider what is actually happening. The world's largest borrower stepped into the market to support the price of its own debt. Its second intervention in three weeks, after the Treasury moved to prop up the Japanese Yen on July 31st, the first American intervention in the Yen since 1998
The US national debt is now crossing $40 trillion.
Interest payments alone on that debt run north of a trillion dollars a year, more than the defense budget by itself. And a week ago, the government sold $25 billion of 30-year bonds at the highest rate in 25 years. Over the past week, we asked our guests who are economists, fund managers and traders the same question. Why does the government keep stepping into its own markets and what happens if the interventions stop working? They disagree on plenty, but on one point, they do agree. The Federal Reserve is no longer setting the price of money in America, the bond market is. We begin with Danielle DiMartino Booth, CEO of QI Research, who predicted this exact move one day before the announcement.

**Danielle DiMartino Booth** (1:46)
Well, I think the closest historical corollary would be Operation Twist. Of course, the Fed has been involved in the past with Operation Twist episodes, but in the current case, it is the Treasury taking the reins. This is a very controversial thing to do, to be intervening in our Treasury market.
On the other hand, I'd rather have the Treasury taking a direct role, as opposed to leaving the onus on the Federal Reserve one day to step in with quantitative easing. I would rather have it be in the hands of the Treasury. This will probably anger a lot of risky asset investors who, day in, day out, they're doing the basis trade, and hedge funds have record positions in the US. Treasury market. Right now, this is probably a huge surprise to them that Besant came in to do this. But there's been rumblings about taking long maturity, taking duration out of the Treasury market, and shifting that into Treasury bills for some time now. We've known that Besant has the power and the authority to move forward with this. In fact, it was his predecessor, Janet Yellen, who started out with the smaller program, but it has now been doubled up to $4 billion a month.

**Matt Milligan** (3:05)
Booth calls it Operation Twist, run out of the Treasury instead of the Fed. Adrian Day, president of Adrian Day Asset Management, says the intervention is aimed at a deeper problem. The investors who are supposed to buy America's long-term debt have stopped showing up.
Here's Adrian with the call.

**Adrian Day** (3:21)
Yeah, yeah. Well, look, David, first of all, as I've said to you before, I don't pretend to be a credit or bond specialist. But I mean, clearly, if the bond market is weak and evidence of that would be yields moving up, that just makes it so much more difficult for them to sell those bonds. Even though the interest, the yield is higher, we know just from empirical evidence that higher yields don't always attract more buyers because higher yields are, other things being equal, a reflection of weakness in the underlying market, the underlying currency, the underlying economy. That's why Brazilian bonds are not the top performance this past year, despite high yields.
So, I mean, I think the fundamental concern is selling bonds. And if the yield moves too high, that means the bonds are going down. That is a reflection of weakness in that market. And we've already seen for the last few years, we've seen increasingly, you know, difficulty. We haven't had any failed auctions, but we've had fewer and fewer people willing to buy the 20 and 30 year as an investment.
Yeah, people say, oh, you know, the foreign participation has gone up, but yeah, but I mean, a lot of that is the Cayman Islands, which are head fronts buying for trades. It's not the buyers we want in treasuries, long-term people who are going to buy it and hold it for 30 years, which is primarily pension funds and insurance companies primarily in the US and in foreign governments and foreign institutions. Those are the people who are going to buy and hold for 20, 30 years, and they're just not interested.