The US Treasury will double the maximum size of its \u201cliquidity support\u201d buybacks in the 10\u201320 and 20\u201330-year maturity sectors to $4bn per operation, up from $2bn, with the expanded schedule running from 9 September to 4 November. The plan involves purchasing older long-dated Treasuries in the open market and retiring them, while funding the programme through sales of shorter-term notes and bonds. The backdrop is an annual federal interest bill of more than $1trn and a bond market valued at about $32trn.<\/p>\n
Yields moved lower after the announcement: the 30-year closed on Tuesday, 18 August, at 5.31% after an intraday peak of 5.34%, the highest since 2007, then ended Wednesday at 5.19% before rebounding to 5.24% on Thursday morning. The Treasury also held a 20-year auction on Wednesday, and its August quarterly refunding statement set out plans to sell $125bn of 3-, 10- and 30-year securities, including a $25bn 30-year bond. Gold rose above $4,500 an ounce on Wednesday for the first time in two months, and silver traded above $68 an ounce.<\/p>\n
With the Treasury’s expanded buyback operations set to launch on September 9, we expect a temporary cap on long-term yields over the coming weeks. Derivative traders should consider buying short-term call options on long-duration Treasury ETFs, like TLT, to capture this artificial price bump. However, since this intervention is scheduled to end on November 4, we must be ready to transition into put options as yields inevitably snap back.<\/p>\n
This maneuver of selling short-term bills to buy long-term bonds will temporarily flatten the yield curve. We can capitalize on this by trading yield curve spreads, specifically targeting a flattening trend ahead of the September launch. With the U.S. national debt currently projected to surpass $40 trillion, this artificial flattening will quickly reverse into a steepener once natural supply-and-demand forces take back control.<\/p>\n
This blatant yield suppression is highly bullish for precious metals, which have already reacted with gold climbing past $4,500 and silver clearing $68. We recommend buying call options on gold and silver futures to leverage this momentum over the next few weeks. If investors completely lose confidence in the Treasury’s ability to let the market clear naturally, we could see an absolute flood of capital into these defensive assets.<\/p>\n
Finally, the sheer desperation of this $4 billion operation means we are entering a period of extreme market volatility. We should look at buying straddles or strangles on Treasury options to profit from the wild swings this tug-of-war will create. As the September 9 start date approaches, positioning for high volatility is our best way to capture the chaos of this intervention.<\/p>\n\n\n\n