In a surprising move, the US Treasury announced a significant increase in buybacks of long-end US Treasuries. This unexpected development has led to a weakening of the dollar, which some analysts see as a sign of financial repression. In this blog post, we will explore the reasons behind this move and its potential implications for the US economy and the value of the dollar.

Firstly, the buyback announcement and Japan’s recent encouragement to use the FIMA facility for FX reserves can be seen as signs of increasing administration unease over the ongoing rise in long-end US yields. This could be interpreted as a response to the growing concern about inflation and the potential impact on the economy.

Secondly, both developments can be viewed as soft-form financial repression policies aimed at containing the long-end of the US yield curve. As we discussed in our Pennsylvania plan last year, the possible need for financial repression in the US Treasury market is a growing concern. The buyback operation and the use of the FIMA facility are seen as ways to manage the market and prevent a sharp increase in interest rates.

Thirdly, the weakening dollar can be attributed to the fact that if the market price of USTs is not “allowed” to adjust down, the foreign exchange price of UST owned by foreign investors has to adjust via a weakening in the dollar. This highlights the potential for distortionary measures to impact the value of the dollar.

Fourthly, the buyback operation is similar to the Fed’s operation twist, where Treasury would have to issue more treasury bills to finance the removal of duration from the market. This could lead to an easing of financial conditions, which may necessitate an offsetting tightening from the Federal Reserve. If Chair Warsh does not recognize the buyback as a factor driving an easing of financial conditions, it could be seen as a dollar negative driver.