The Messaging Matters

Treasury Secretary Bessent took a boring macro week last week and made it much more exciting by doubling the size of their long-end liquidity support buybacks from $2B to at least $4B per operation. Wow, what does that even mean?

For boring details, the program doesn’t actually start until September 9th and has an end-date of November 4th. It’s probably worth noting Nov. 4th is the date of the next QRA and liquidity program, so it’s easy to imagine this program will continue if the need is there. The program targets 10-year to 30-year Treasuries. These are price-sensitive reverse auctions where they don’t have to buy the maximum if offers are unattractive. It’s not about buying, but more about liquidity. Similar operations have lowered long-yields consistently in the past, though.

The size of the program is small, versus a Treasury market greater than $30T in size. The messaging matters, though. Apparently hitting long-term record yields isn’t something that Bessent wants to allow. Bessent is sending a message that long-yields shouldn’t go higher. While the initial move in Treasuries was a large one-day move, it only took us back to rates seen the previous week.

Anytime the government tries to control a level, such as long-dated yields, something else will move to get the market positioned right. In this case, if yields can’t move where the market wants them, the market is going to get the dollar down instead, which is what we saw.

What should we expect, going forward? It probably goes without saying the likelihood of long-dated Treasuries going down was just significantly diminished. That doesn’t mean Treasuries have to go up a lot, but they’re unlikely to go down. If nothing else, all those people shorting bonds just got a message that the Treasury hates them and doesn’t want them to make money.

Broadly speaking, past, similar programs also see the dollar go down, plus gold and other rate-sensitive names go up, which includes stocks. Within the stock market, it should be no shock that the more rate-sensitive the name, the better the chance it goes up. Lower long-term yields reduce the discount rate on far-out earnings, along with easing financing costs, which supports stocks.

Thus, lower long rates tend to be friendly to a variety of areas in the stock market. If you’re defensive, REITs and gold miners make sense. If you’re bullish, long-duration growth ideas like AI or space stocks should have better odds. Small caps and cyclicals get financing relief, so they can do well. We own most of those spaces, defensive and otherwise.

Of course, this operation isn’t the only thing going on in markets. We also got that echo-bust, where momentum stocks took a sharp break from their relief rally. I think it’s fair to say that impaired a full-fledged reaction to the Treasury announcement, as fallout continues from the July momentum wipeout. Post-Friday options expiration (OpEx) should provide a cleaner read.

Ultimately, the Treasury has made it clear they don’t want higher long-rates. In the past this has worked, and we know what likely effects are. I sure don’t see the point in fighting that, though it seems others disagree, with long-yields drifting back up as the week continued. If this not-yet-started program is insufficient to get yields down, we’ll just see more actions to get it done. That’s the messaging. Owning risk assets should be considered a less-challenging option after this Treasury action.

Flash PMI rose to 56 vs. prev. 54.4, with Manufacturing slowing a bit and Services doing quite well at 56.8 vs. prev. 54.4. Pretty good.

Oil fell -2% as tanker traffic in the Strait of Hormuz over the weekend.

Iran’s currency dropped to a record low as new sanctions start.

Trade talks between Canada and the US failed, leading to tariffs being implemented on both sides.

Gold is up almost another percent at a three-month high as the dollar debasement trade continues.

Chicago Fed National Activity Index today.

Bottom line: Quiet news to start the week but NVDA earnings on Friday and Jackson Hole on Friday could create excitement.

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