The Treasury Plan Is a Band-Aid
The Treasury's plan treats the symptom, not the cause, of what is happening at the long end of the bond market. It announced plans to raise buybacks from $2 billion up to possibly double that amount. Against the full size of the long end, that is a small piece. The messaging matters more than the size. It signals that the Treasury itself is worried about the level of long-end interest rates and the speed of the move higher.
The 30-year Treasury is pulling unusual attention. The long end normally does not take the top spot in the fixed income market. Look at it two ways. The level sits where it has not been since 2007, which is worrying on its own. The speed of the climb is the other concern, and the Treasury appears to be reacting to both.
A Global Move, Not Just the US
Rising yields are a global event, not only a US Treasury story. In the US the climb has been more of a slow creep, while other parts of the world have seen sharper moves up. A weaker dollar tied to this could help US exports.
Positioning: Stay Below Benchmark Duration
The advice to Charles Schwab (SCHW) investors is caution on the long end and a below-benchmark duration. Moving further out on the yield curve was not attractive a few weeks ago and still is not, because long-term yields could go higher from here.
For the 10-year Treasury, the expected trading range is about 4.25% to 4.75%, and it is close to the upper edge now. Direction matters more than the range. There is limited downside on how low the 10-year can go. Break the yield into three parts: Fed funds expectations, inflation expectations, and the term premium. The term premium has been moving up, driven by the federal deficit and the fiscal situation. It should stay high going forward, which puts a floor under how far yields can fall.
Some see a wider 4% to 5% range as healthy given a strong economy, describing it as the "roaring 20s."
Jackson Hole Next Week
Attention turns to Jackson Hole and what comes from the Fed task forces. The aim looks like changing the narrative of how the Fed operates and how it views many things. Expect a strong focus on the inflation mandate, price stability, and getting inflation back under the 2% target. The 2% target will likely stay intact rather than be thrown out. The bigger question is whether there is a lean into what those task forces are finding.
