The Treasury Department will be launching a series of buybacks for seasoned and harder-to-trade debt in June, providing support to bond traders stuck in a waiting game over Federal Reserve rate policy. In addition, the Fed is set to begin tapering its balance-sheet unwind, known as quantitative tightening, which should further support the Treasury market. This comes as investors have adjusted their expectations for rate cuts due to strong US growth and inflation. Treasury yields have declined since the start of May, signaling some mixed data and hints from Fed officials that rates will stay higher for longer.
The buybacks are expected to be beneficial by providing a backstop for the Treasury market, while the slowing of the Fed’s quantitative tightening is seen as prudent risk management. Derivative markets are not pricing in further rate hikes despite some Fed officials indicating a willingness to tighten policy further if needed. The ICE BofA MOVE Index, which measures bond volatility, has dropped to its lowest level since February 2022. The bond market is settling into ranges as investors await economic data, such as the May employment report on June 7.
The Treasury buybacks will involve purchasing existing government debt and replacing them with larger current issues, aiming to boost trading ease as older securities are typically less liquid. Market liquidity has improved this year, but still remains below its decade-long average. The Fed’s upcoming reduction in quantitative tightening is expected to provide further support for liquidity in the economy and banking system. Friday’s release of the personal consumption expenditures index will provide important data on inflation.
Positioning in the bond market has become more balanced, with new short wagers appearing and long bets unwinding slightly. Some investors see value in 10-year Treasury yields at around 4.46% as volatility has fallen significantly. The bond market may rally by year-end as the economy slows and the Fed cuts asset runoff in June, while the Treasury Department begins liquidity support buybacks. Economic data releases in May and Fed meetings may provide further insight into the future direction of bonds.
Overall, the Treasury market is expected to benefit from the upcoming buybacks and reduced quantitative tightening by the Fed. Investors are closely watching economic data for clues on future rate policy and inflation, as well as for opportunities in the bond market. With improved market liquidity and reduced volatility, bond yields are likely to remain within ranges as the Fed keeps rates steady for the foreseeable future. Bond traders are cautiously optimistic about the prospects for the Treasury market in the coming months.
