All Eyes On Kevin Warsh’s Jackson Hole Speech As Bond Market Shrugs Off Buyback Support From Treasury Last Week

On Monday morning, the yield on the 10-year, 20-year, and 30-year Treasury notes traded between 2.5 and 3 basis points lower as of this writing after a volatile week.

• Last week, the Treasury Department announced that it will at least double the size of liquidity support buyback operations for longer-dated nominal coupon securities.
• The announcement came as yields climbed amid sustained inflationary pressure, a high fiscal deficit, and a rising U.S. debt.
• Mohamed El-Erian noted that all eyes, ears, and trading algorithms will be focused on how far the Chair goes in summarizing his “reaction function” and what he signals about both short- and longer-term reforms to Fed operations.

Yields on long-dated U.S. Treasuries showed a marginal decline on Monday morning after witnessing a volatile week as traders await Federal Reserve Chair Kevin Warsh’s debut keynote address at the Jackson Hole Summit on Friday.

Last week, the Treasury Department announced that it will at least double the size of liquidity-support buyback operations for longer-dated nominal-coupon securities. The announcement came as yields climbed amid sustained inflationary pressure, a high fiscal deficit and a rising U.S. debt.

Although yields declined in the immediate aftermath of the news, they pared back most of the gains later, ending higher.

On Monday morning, the yield on the 10-year, 20-year and 30-year Treasury notes traded between 2.5 and 3 basis points lower as of this writing. The iShares 20+ Year Treasury Bond ETF (TLT) was among the top trending tickers on Stocktwits.

El-Erian Says US Treasury Needs To Develop Reaction Balance

Economist Mohamed El-Erian noted in a Substack post over the weekend that with longer-term yields rising again after the buyback announcement, the U.S. Treasury will need to develop a reaction function that balances four main responses: Leaning into deeper and broader intervention tools, outlining genuine upcoming fiscal reform, accepting high and rising rates, and focusing policies on softening the blow to the most interest-sensitive segments of the economy and society.

Notably, Warsh has highlighted that he wants to reduce the central bank’s reliance on forward guidance. Regardless of his reluctance, bond traders will like to see whether the Fed Chair has anything to say about the current situation.

Talking about the Jackson Hole Summit, El-Erian noted that all eyes, ears, and trading algorithms will be focused on how far the Chair goes in summarizing his “reaction function” and what he signals about both short- and longer-term reforms to Fed operations (including the “dots,” the frequency and nature of FOMC meetings and press conferences, and broader monetary policy issues).

Key Data Releases

Bond market participants will also be keenly eyeing the release of the Fed’s preferred gauge of inflation, the PCE Index, and the GDP report this week.

Meanwhile, the TLT is down by over 5% this year while the iShares 7-10 Year Treasury Bond ETF (IEF) is down over 3%.

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