By Elwin de Groot, head of macro strategy at Rabobank
Intervening Oneself Out Of Quagmire?
Yesterday’s market moves again showed that jawboning and temporary interventions are rarely enough when the underlying problem is fundamental.
As a “thank you” for Trump’s last-minute intervention to reduce joint US-South Korean military drills – and his claim to have spoken with Kim Jong Un – Pyongyang launched around 10 ballistic missiles on Thursday, according to South Korean news agencies. The message was clear: action versus words. Developments in the Middle East, where Iran has effectively defied US military power, may only have reinforced North Korea’s conviction that its nuclear missile programme gives it an edge even Iran still lacks. The broader ramifications are unsettling.
Markets told a similar story. The benchmark US 10-year Treasury more than gave back the gains made the previous day, while the 30-year long bond retraced over 7bp after Thursday’s 10bp rally, which followed Treasury’s announcement that it would at least double long-dated bond buybacks from 9 September through 4 November.
The price action may matter more than the amounts involved. The additional purchases total only about USD 14bn in the current refunding quarter – a rounding error next to a roughly USD 32trn Treasury market and federal debt now above USD 40trn. Nor is this quantitative easing: Treasury must finance buybacks by issuing other debt. The programme can improve liquidity in off-the-run bonds and temporarily reduce the duration dealers and investors must absorb, but it neither cancels debt nor changes the deficit path.
That distinction explains why Th
