The U.S. Treasury’s initiative to expand long-end bond buybacks has done little to durably suppress long-term yields, Barclays economists said, as structural forces continue to push term premia higher.
Long-term Treasury yields initially fell following the announcement but largely retraced the decline within a day, according to a note from Barclays led by Jonathan Millar. The bank described the buyback expansion as a modest analogue to the Federal Reserve’s Operation Twist, noting that markets were unlikely to respond materially without stronger fundamental justification.
Barclays identified three key drivers behind the rise in long-term yields: a deteriorating U.S. fiscal outlook, increased competition for long-duration investors from AI-related corporate bond issuance, and a more price-sensitive Treasury investor base. The bank cautioned that efforts to reduce duration supply would not address the underlying causes of yield curve steepening, which have kept term premia elevated.
The analysis drew parallels with Japan’s recent experience, where attempts to reduce long-end issuance produced only temporary market reactions before fading. Barclays also dismissed the likelihood of a Federal Reserve response to rising term premia, citing minimal movement in broader financial conditions and the Fed’s limited sensitivity to 30-year yields in its financial conditions index.
Recent economic data supports a baseline outlook of moderate growth and gradual disinflation, with Barclays maintaining a September Fed hold as the most probable outcome. July payrolls undershot expectations with downward revisions to prior months, while retail sales declined sharply. Core PCE inflation for July is estimated at 0.19% month-over-month, reinforcing the view of a controlled disinflationary trend.
Barclays will monitor Fed Chairman Warsh’s remarks at the Jackson Hole symposium on August 28 for signals on the central bank’s communication strategy, though no explicit guidance on future policy adjustments is anticipated.
