Fed doubles long-term bond purchases to contain debt costs
The Fed doubles its long-term bond purchases to contain rising interest rates as US public debt approaches $40 trillion.
English · Original discussion in Spanish · Published
The Fed doubles down on long bonds to curb the debt bill
The Federal Reserve has responded to the latest surge in US debt interest costs with the usual playbook: doubling its repurchases of long-term Treasury bonds. The decision, first reported by El Economista, gave European bond markets a brief moment of relief after a tense start to the session. The truce, however, lasted barely a day: stocks fell again and bond yields resumed their climb.
The $40 trillion hole
The numbers explain the urgency. The United States is approaching $40 trillion in public debt, with a deficit of nearly $1.8 trillion and an annual interest bill exceeding $1 trillion. Any uptick in 10- and 30-year bond yields makes mortgages and corporate credit more expensive and pressures global equities. Against that backdrop, every rate rise is an extra bill.
The playbook is nothing new. The ECB tried something similar with Spanish debt after the pandemic, buying around €200 billion to hold down interest costs. The difference is that back then the intervention was presented as exceptional; now it seems to be the new normal.
Operation twist or time bomb
There is a reading for every taste. The most benign calls it a classic operation twist: borrow short-term, where rates are low, and retire long-term debt carrying high interest. That flattens the curve, creates no direct inflation, cheapens financing for big tech and weakens the dollar to boost exports. Elegant on paper.
The skeptical reading points to the context: the intervention came days after the Fed had to contain the yen's devaluation so that Japan would not raise rates and the unwinding of the carry trade would sink Wall Street. In other words, putting out chain-reaction fires. The effect, moreover, evaporated within 24 hours. One sector takes it for granted: debt will have to keep being bought until the midterm elections, and each dose will yield less. The next intervention is coming. The question is how long the party can last with the printing press running at full tilt.
The Federal Reserve has responded to the latest surge in US debt interest costs with the usual playbook: doubling its repurchases of long-term Treasury bonds. The decision, first reported by El Economista, gave European bond markets a brief moment of relief after a tense start to the session. The truce, however, lasted barely a day: stocks fell again and bond yields resumed their climb.
The $40 trillion hole
The numbers explain the urgency. The United States is approaching $40 trillion in public debt, with a deficit of nearly $1.8 trillion and an annual interest bill exceeding $1 trillion. Any uptick in 10- and 30-year bond yields makes mortgages and corporate credit more expensive and pressures global equities. Against that backdrop, every rate rise is an extra bill.
The playbook is nothing new. The ECB tried something similar with Spanish debt after the pandemic, buying around €200 billion to hold down interest costs. The difference is that back then the intervention was presented as exceptional; now it seems to be the new normal.
Operation twist or time bomb
There is a reading for every taste. The most benign calls it a classic operation twist: borrow short-term, where rates are low, and retire long-term debt carrying high interest. That flattens the curve, creates no direct inflation, cheapens financing for big tech and weakens the dollar to boost exports. Elegant on paper.
The skeptical reading points to the context: the intervention came days after the Fed had to contain the yen's devaluation so that Japan would not raise rates and the unwinding of the carry trade would sink Wall Street. In other words, putting out chain-reaction fires. The effect, moreover, evaporated within 24 hours. One sector takes it for granted: debt will have to keep being bought until the midterm elections, and each dose will yield less. The next intervention is coming. The question is how long the party can last with the printing press running at full tilt.
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Summary of a discussion on Burbuja.info - Foro de economía, actualidad y política., translated from Spanish and reviewed before publication. Read the full discussion (16 replies).
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