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The US Treasury resumes buying its own debt. This is essentially a repo. The last time was in 2002, more than 20 years ago. This is a very popular term in the stock market – a few weeks ago Apple announced the largest buyback in history, with a planned $110 billion – but from today the program will also make its way to the bond market. The action announced by Treasury Secretary Janet Yellen is part of a new quarterly refinancing program with purchases of $2.5 billion per week, divided between nominal coupon bonds ($2 billion) and inflation-linked bonds (Tips, $500 million). We are therefore talking about $10 billion per month, which should be injected into the system at least until July. And the possibility of an extension is not excluded.
The Treasury’s goal is to manage the public debt and support market liquidity while avoiding unexpected or destabilizing fluctuations. In addition to this, liquidity is another driver of the market, and liquidity is one of the main drivers that has always guided financial markets. Starting on June 1, the Fed will reduce its monetary supply program, technically known as quantitative tightening. In fact, starting in March 2022, the Fed began to reduce the number of securities on its balance sheet (including $60 billion in government bonds and $3.5 billion in mortgage-backed securities) at a rate of $95 billion per month.
Starting in June, the reduction will be reduced to 60 billion, as the share of Treasury bonds that will be “reduced” will be reduced from 6 billion to 25 billion. The calculation of public debt securities is easy if we take into account that the Treasury will buy 10 billion dollars of securities per month in another room of the building (through the repo program). We will go from a negative balance of 60 billion per month to a negative balance of 15 billion. Essentially, the selling pressure on Treasury bonds should be significantly reduced. We have seen this in the moving index (an index that measures the volatility trends in the US bond market) over the past few trading days. It fell to around 80 points, the lowest threshold since March 2022 (for comparison, the index jumped to 199 points in March 2023 when the US regional banking crisis broke out). It may be interesting to analyze this trend, because there is a negative correlation between bond volatility and the stock market. Generally speaking, an increase in bond volatility (bonds are a kind of “recession guardian” among investment categories) has a negative impact on the stock market. And vice versa.
This correlation was confirmed in the past few trading days, when US bond volatility fell (triggered by news of US Treasury buybacks and the Fed’s reduction of fund outflows starting in June). It is worth noting in this regard that yesterday, in low-volume trading, the Nasdaq index refreshed its all-time intraday high, reaching 17,000 points for the first time in history. Needless to say, dragging it down was Nvidia’s stock price, which rose 4.5% to $1,100 after the success of the XAi financing round: the startup founded by Elon Musk a year ago has raised $6 billion and is now valued at $2.4 billion. billion.
In terms of macro data, the US consumer confidence index started to recover after three consecutive months of decline, reaching 102 points, above the previous 97.5 and the expected 96. The S&P CoreLogic index of new home prices in the 20 largest cities in the United States rose by 7.4% year-on-year in March, exceeding expectations (7.3%). Therefore, Neel Kashkari, President of the Minneapolis Federal Reserve, declared to CNBC that before a rate cut, the slowdown in inflation must show a positive trend for several months and that in the current situation “nothing can be ruled out”. Not even a rate hike. Despite this, the EUR/USD exchange rate still looks moderate and does not seem to offset the expected divergence in monetary policy between the Federal Reserve and the European Central Bank, the latter of which is now ready to cut interest rates for the first time at the meeting on June 6, taking into account the forecast that the inflation rate in the old continent will fall to 2.9% (3% in March) over the next 12 months. Not to mention that next Friday the key data on the trend of US consumer prices will be released together with the personal consumption expenditure index, which is the preferred parameter for the Fed to formulate monetary policy.
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