Is it likely to backfire on US Treasury yields? Citadel warns the US Treasury that “financial suppression” may weaken the dollar and boost inflation

The Zhitong Finance App learned that the US Treasury recently lowered long-term financing costs by expanding the scale of long-term treasury bond repurchases, but this practice is triggering warnings from Wall Street institutions about potential side effects. Citadel Securities (Citadel Securities) believes that the US government's attempt to limit long-term yield increases by interfering in the bond market is essentially gradually forming a kind of “financial suppression”. Not only will it be difficult to eliminate the underlying factors driving higher US bond yields, but it may also shift pressure to the US dollar and inflation.

US Treasury Secretary Vincent announced an expansion of the US debt repurchase program last week. After 10-30 year US Treasury yields rose to multi-year high levels, the Treasury Department decided to at least double the scale of repurchase operations for treasury bonds with relevant maturities.

According to reports on Monday, Bezent may also consider using cash from the US Treasury General Account (TGA) to fund treasury bond repurchases. TGA is equivalent to the main cash account held by the US Treasury with the Federal Reserve.

Citadel: Lowering US Treasury yields only shifts pressure to other markets

Nohshad Shah, head of fixed income sales for Europe, Middle East and Africa at Citadel Securities, said in a customer report that from a broader perspective, the US Treasury's approach amounts to “financial suppression” to a certain extent.

The so-called financial suppression usually means that the government maintains financing costs below the level naturally formed by the market through policies or market intervention, thereby reducing the financing pressure on the government's huge debt.

Shah believes that if the market demands higher yields on long-term treasury bonds due to problems such as the US fiscal deficit and inflation, then artificially limiting the fall in US bond prices will not actually make these pressures disappear.

Instead, pressure may be transferred to other asset markets, with the US dollar likely to be the first to bear the brunt.

As long-term US bond yields are depressed, dollar assets may become less attractive to global investors, thereby weakening the dollar. The depreciation of the US dollar is also likely to further increase inflationary pressure on the US by raising the prices of imported goods.

Shah said, “Stopping US Treasury bonds from clearing the market at a lower price will not remove this pressure; it will only shift the pressure elsewhere.”

The effect of long-term bond repurchases is limited, the dollar weakens, and gold rises

Citadel believes that by at least doubling the scale of 10-30 year US bond repurchases, it actually sends a very clear signal to the market that the US government is uneasy about the continued high yield on long-term treasury bonds.

However, up to now, the Ministry of Finance's expanded repurchases has provided limited actual support to the bond market.

After the Ministry of Finance announced an expanded repurchase plan, the price of long-term US bonds rose for a while, and yields fell, but the 30-year US bond basically recovered the increase the day after the news was announced.

Meanwhile, the US dollar weakened while the price of gold rose. This is also partly in line with Citadel's concerns. When price adjustments in the bond market are interfered with, investors may turn to other assets such as dollars and gold to express concerns about fiscal and inflation risks.

The real problem comes from finance, monetary policy, and the AI investment boom

Citadel believes that the reason long-term US bond yields continue to rise is not only due to market liquidity issues, but there are deeper economic factors behind it.

Shah pointed out that in a situation where employment in the US is close to sufficient, the relatively relaxed fiscal and monetary environment is still stimulating the economy, while artificial intelligence infrastructure construction is absorbing large amounts of capital.

Together, these factors have boosted market demand for capital, and have also increased the upward pressure on long-term interest rates.

Therefore, even if the Ministry of Finance temporarily reduces long-term returns through repurchases, it will not be able to eliminate these fundamental factors.

What is even more alarming is that if policy intervention causes the dollar to weaken further, the overall financial environment in the US may become more relaxed. On the one hand, this may stimulate economic demand; on the other hand, a depreciation of the dollar will raise the cost of imported goods, thereby increasing the risk of a new acceleration in inflation.

The bond market sends a clear signal: policies should be tighter

Citadel believes that the current US bond market is sending a relatively clear signal to policy makers that fiscal policy or monetary policy needs to be further tightened.

Shah said that the real long-term solution to the problem is not to repeatedly interfere with the bond market through repurchases, etc., but rather that the government makes more difficult choices in fiscal policy. At the same time, the Federal Reserve needs to be more proactive in dealing with the risk of inflation.

He pointed out that the Federal Reserve should even consider further rate hikes if necessary.

“The bond market's message is very direct: fiscal or monetary policy should be tighter.” Shah said, “The lasting solution is not repeated intervention, but rather making more difficult choices in fiscal policy and the central bank taking the initiative to take the lead in inflation, including raising interest rates when necessary.”

Overall, Citadel Securities's warning means that although the US Treasury's expansion of long-term treasury bond repurchases can ease upward pressure on long-term yields in the short term, if fundamental issues such as fiscal deficits, inflation, and capital demand do not improve, market pressure may not go away, but only shift from the US bond market to dollars, gold, and other assets.

This has also made Bezent's recent policy of trying to lower long-term financing costs face a potential contradiction: lowering long-term US bond yields may help the government reduce financing pressure, but the resulting weakening of the US dollar and relaxation of financial conditions may also increase the risk of inflation, which ultimately forces monetary policy to maintain higher interest rates or even tighten further.