Beeson intervened to save the bond market, ended up saving gold and Bitcoin—now, everyone is waiting for Wash.
Last week, U.S. Treasury Secretary Beeson announced a at least doubled expansion of the long-term Treasury repurchase size, trying to suppress the rising long-term yield. The effect was immediate, but lasted less than a day—the yield subsequently returned to high levels, remaining relatively flat for the whole week.
In a post-event interview, Beeson stated that the market had "overreacted a bit" and emphasized that the Treasury Department has a "powerful toolbox." However, the market gave a different answer through its actions: the US dollar fell nearly 1% during the week, gold broke through $4600, and Bitcoin surged over 25% in a single week.
This combination was characterized by Nomura Securities' Charlie McElligott as a "pressure release valve"—as the authorities tried to stabilize the long-term interest rates, market anxiety instead vented elsewhere.
This Week's Focus: Can Wash Provide Answers
The baton has now been passed to Federal Reserve Chairman Powell. He will speak at the Jackson Hole Economic Policy Symposium this Friday.
Since taking office in May, Wash has provided almost no forward-looking guidance. His remarks after the last FOMC meeting directly triggered a bond market sell-off—market participants are extremely sensitive to what he says and how he says it.
According to Bloomberg, traders are most eager to know: faced with stubbornly higher than 2% target inflation and a deteriorating fiscal situation, what exactly is the Fed's policy reaction function.
TD Securities' US rate strategist Molly Brooks warned: "If it's the same old story, I think the market will be disappointed, which could exacerbate the selloff at the long end that we've already seen."
HSBC rate strategist Dhiraj Narula believes that Wash has the opportunity to reassure the market through his statements: "If Chairman Powell can characterize the potential inflationary pressures, in our view, this is already sufficient to provide a basis for lowering uncertainty-related term premiums.
Bloomberg Markets Live strategist Michael Ball stated: Beeson can adjust the debt maturity structure, but only the Fed can anchor inflation expectations. Powell's Jackson Hole speech must reaffirm that the 2% target is still achievable, and state clearly—if inflation persists, even in the face of friction with the administration, policy action will be taken.
Is the Fed's Operation Insufficient? What's Behind It?
Peter Tchir from Academy Securities pointed out that the US government currently has $7.5 trillion in Treasury bills and $21.7 trillion in coupon bonds outstanding. Powell's repo operations are "at least $40 billion" each time, almost on a weekly basis—doubling from the previous $20 billion, which may sound significant but has not been able to consistently impact the market.
Tchir assessed that this is not QE. Powell's operation is essentially just "rearranging chairs on the deck," not actually creating new money. The market reaction of gold rising and the dollar falling more so reflects an overly enthusiastic interpretation of the "currency debasement" narrative rather than the Treasury expanding the money supply.
Another crucial yet lesser-known fact: the Fed currently holds over 50% of all 10- to 15-year Treasury notes. This is quite far from a "free market." Additionally, the Fed holds nearly 20% of long-term bonds.
Even more paradoxically, the Fed also holds nearly $426 billion of coupon bonds maturing within a year, with an average coupon of only 2.9%, while the current effective federal funds rate is 3.63%—resulting in the Fed continuously losing on this holding due to the interest rate differential.
Operation Twist: Can the Fed Save What Powell Can't?
This context has led the market to start discussing a long-dormant tool: the Fed's version of "Operation Twist."
The logic is not complex: if the Fed were to sell those $426 billion of short-term bonds and instead buy an equivalent nominal amount of 20-year or longer-dated bonds, while it would incur an initial mark-to-market loss, it could achieve substantial spread income (around a 5.25% holding yield versus a 3.63% funding cost). More importantly, this would absorb more than 15% of the float of bonds over 20 years, effectively suppressing long-end yields.
From a Washington perspective, "Operation Twist" is not considered QE because it does not change the Fed's total nominal bond holdings, making it more politically acceptable. Tchir's assessment is: if the White House truly wants a decline in long-end yields, it must abandon the controlled "light touch" of Powell and push for full Fed involvement in Operation Twist.
Bloomberg analysts, including Ball, hold a similar view: Powell's approach is increasingly resembling a "lite version of Operation Twist"—the Treasury exits long-dated debt through repos, shifting to short-term bills and coupons; while the Fed, through reserve management, purchases short-term bills to absorb supply at the front end without expanding the balance sheet. However, this combination carries inherent contradictions: the higher the proportion of short-term funding, the greater the Treasury's exposure to policy rates. If inflation forces the Fed to raise rates, interest costs will reset at a faster pace; and if the Fed hesitates due to fiscal concerns, the market will penalize its independence with higher term premiums.
Therefore, either the Fed will step in to support Powell, or this intervention will end in failure—where intervention failures often pose greater risks than non-intervention.
Data Window: Wednesday PCE Leading the Way
Prior to the Jackson Hole speech, the market will face an important data point—the July Personal Consumption Expenditures (PCE) index released on Wednesday.
According to Bloomberg, over the past month, inflation, employment, and retail sales data have either met expectations or fallen below, leading traders to lower their near-term rate hike expectations. If the PCE data continues this trend, it may provide some cushion for Powell's speech.
However, the time window is narrowing. Bloomberg analysis points out that mid-term election political pressures, coupled with the U.S. Bureau of Economic Analysis updating the PCE statistical methods at the end of September, may add complexity to the tightening actions post the September FOMC meeting in terms of political sentiment.
5% is Key, Sustainability of Depreciation Trading Questioned
Wall Street Horizon stated that Bank of America strategist Michael Hartnett views the 5% level on the 30-year Treasury yield as a significant threshold, believing that if it cannot be broken, it will intensify pressure on the dollar and high leverage sectors—including AI super-scale computing enterprises and private credit.
Bridgewater Associates founder Ray Dalio issued a warning last Friday, suggesting that investors reduce their bond exposure, hold gold and some Bitcoin to hedge against a potential U.S. debt crisis.
This pressure is not unfounded. Bloomberg points out that as tensions in Iran continue to escalate, the fiscal outlook is increasingly on the market's radar; meanwhile, AI-related corporate bond issuances have surged, competing for the same pool of capital as U.S. Treasuries; foreign investors' demand for U.S. Treasuries is also becoming more "price-sensitive," with a decreasing tolerance for the current policy direction.
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