US Treasury moves to ease bond market pressure as Fed wrestles with rate rises

The US Treasury announced on Wednesday it will double the size of its government debt repurchases to stabilize a bond market experiencing inflationary pressure. The move by Treasury Secretary Scott Bessent comes as long-term yields hit their highest level in 20 years, due to concerns over the potential renewal of tensions between the US and Iran.

Treasury will focus on the 10-20 year and 20-30 year sectors, doubling the size of each operation from $2 billion to $4 billion, effective from September 9 and running until November 4. The change aims to provide greater liquidity support in long-dated nominal sectors, where market participants have shown strong interest. Inflation has remained persistent due to the Iran war, with energy supply disruptions and rising costs for AI development and weak electrical grids contributing to price pressures.

July inflation data showed a slight drop, but remained above the Federal Reserve's 2 per cent target. Minutes from the July 28-29 Federal Reserve meeting indicated that many officials believed higher interest rates would be necessary if inflation does not decline. Fed officials voted nine to three to keep rates steady, with the possibility of more persistent inflation.

Fed decisions on short-term rates impact other bond yields and borrowing costs for consumers and businesses. Fed Chairman Kevin Warsh's subsequent media conference did not quell investor concerns, as the steepening Treasury curve reflected reduced expectations of Fed rate hikes and supply risks.