Citadel Securities says interventions in the bond market amount to “financial repression.”
The market maker pointed to the Treasury’s plan to increase buybacks of government bonds.
The US has tried to push bond yields lower in the past with mixed results.
The US Treasury’s attempts to keep a lid on long-term bond yields amount to a kind of “financial repression” that could exacerbate inflation, Citadel Securities says.
The Treasury has made moves recently to restrict the steady rise in yields by announcing up to $4 billion of buybacks of US government bonds. In addition to this, CNBC reported on Monday that it could also tap its $1 trillion General Account to fund more purchases.
The news has helped tamp down long-dated bond yields in recent days, with the 10-year and the 30-year yields both falling sligtly on Monday. The yield on the 30-year US Treasury, which recently rose to its highest level since 2007, dipped 4 basis points to around 5.23%, while the 10-year US Treasury yield edged lower 3 basis points to 4.7%.
However, such direct intervention by the Treasury won’t fix the problems at the heart of the fixed income market, Citadel Securities wrote on Monday.
The policy is a reminder for investors that the market for government bonds is under pressure, Nohshad Shah, head of EMEA fixed income sales at Citadel Securities, wrote.
“More broadly, this amounts to financial repression at the margin…policymakers attempting to suppress the market signal rather than resolve the underlying contradiction of procyclical easing in the middle of a generational capex cycle at full employment,” Shah said.
Yields have been climbing for much of this year, largely due to concerns about hotter inflation and the US fiscal outlook. The idea is that a steeper deficit makes investors less willing to hold onto government debt securities at the same premiums as they were in the past. Hotter inflation also raises interest rate expectations, another factor pushing yields higher.
The kind of financial repression Citadel Securities is referring to can have a short-term effect of lowering rates, but is generally thought to be a negative for longer-term economic health. Capping interest rates means central bankers have lost a key monetary policy tool that can help cool the economy when inflation and growth are running too hot. The result could be hotter inflation, which could send yields higher in the long run once the artificial support is removed.
After the US capped rates in the 1960s, Treasury yields ultimately rose in the 1970s due to the “distortionary effects” of interest rate ceilings, the Richmond Fed wrote in a 2021 note. (Inflation also rose in the 70s due to a spike in oil prices at the time.)
Source: Financeyahoo