US Treasury yields hit fresh long-term highs amid surging Oil prices, bond buybacks
- US 30-year Treasury bond yields have rallied to their highest level since the global financial crisis.
- The ballooning US government debt and disappointment about the US Treasury's buyback plans are seen as the main reasons behind the rally.
- Oil prices, nearing $100, add pressure on Treasury bonds.
The yield for the 30-year US Treasury note trades above 5.3%, nearing the 2007 high, when Lehman Brothers collapsed. The benchmark US 10-year hit a 4.865% high earlier on Thursday, accumulating a 25 basis point rally in less than two weeks and a whole half point since late June. Two-year yields have breached the top of the last two years’ range at levels just below 4.5%. What is pushing Treasury yields to these levels?
Financial experts disagree over the main reasons for this trend, with some of them blaming the higher US government debt, which is common in the world's major economies, and is prompting investors to demand higher compensation to purchase Treasury bonds, especially the long-dated ones, which entail a higher risk.
Some voices, however, negate this view. Stephen Miran, the former Chief of US Economic Advisors appointed by US President Trump in 2025, affirmed in a Financial Times article published two weeks ago that the rally responds to investors’ “expectations for long-run economic growth” rather than concerns over central bank or fiscal credibility.
US Treasury's buyback program has failed to tame yield appreciation
Whatever the reason, the bond-buying plan from US Treasury Secretary Scott Bessent to buy back USD 6 billion worth of long-term securities, aimed to support liquidity in the bond market, seems to have disappointed markets, which were expecting a larger intervention.
Analysts at MUFG estimate that if the US Treasury maintains a schedule of nine bond buybacks per quarter and “purchases up to USD6 billion at each operation, then it could give a rough ballpark figure for potential annual purchases of just over USD200 billion.” The experts warn that “it is highly uncertain how long the bigger purchases will be sustained and it is possible the size of operations could even be increased further going forward.”
Apart from that, surging Oil prices are raising the costs of US Government debt via inflation, contributing to the rally. Brent Oil has reached levels a few cents below the feared $100 level, after the US and Iran exchanged attacks on Oil tankers, further complicating the already troubled transit through the Strait of Hormuz, which used to transport about 20% of the global oil supply before the war.
Thursday's focus is on the US Producer Price Index (PPI) report, ahead of the more relevant Consumer Price Index (CPI) data, which is due on Friday. These figures are expected to provide a more accurate picture of inflationary trends and further insight into the outcome of Next week's Federal Reserve (Fed) monetary policy decision.
Fed FAQs
Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.
The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions. The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.
In extreme situations, the Federal Reserve may resort to a policy named Quantitative Easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.
Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.
Author
Guillermo Alcala
FXStreet
Graduated in Communication Sciences at the Universidad del Pais Vasco and Universiteit van Amsterdam, Guillermo has been working as financial news editor and copywriter in diverse Forex-related firms, like FXStreet and Kantox.
