Long-end US Treasury Yields Sell-Off On Buyback Announcement

OVERVIEW : Tuesday, August 18th, 26’

Markets remained cautious as the US-Iran conflict showed no sign of resolution, with Trump reportedly shifting toward a longer-term pressure strategy while talks remained uncertain. Iran continued to assess potential escalation, including possible strikes on US military targets in Europe, while Trump maintained that negotiations could resume at some point. Oil prices remained firm, keeping the geopolitical risk premium elevated. Global yields fell sharply lower, particularly at the long end, after the US Treasury announced it would at least double liquidity-support buybacks of longer-dated bonds to USD 4bln from USD 2bln. The move eased concerns around long-end market liquidity and pushed yields lower, supporting equities and weakening the USD across the G10. Gold surged to around USD 4,522/oz as lower real yields boosted demand for precious metals.

-
US DOLLAR

USD was sold throughout the day, with the Dollar pressured by the sharp decline in long-end Treasury yields following the US Treasury’s decision to at least double liquidity-support buybacks of longer-dated bonds to USD 4bln. The move helped ease concerns around long-end market liquidity and supported broader risk appetite, leaving DXY back around 98.84, near May levels. The FOMC Minutes provided no counterweight, with most participants noting that higher rates could be required if inflation failed to fall, while several members favoured a July hike despite the majority supporting an unchanged rate. However, the Treasury announcement remained the dominant driver of the day, with the initial USD weakness extending into the close.

-

EURO

EUR was supported marginally by USD weakness on the day, with the single currency closing modestly firmer. The in-line Eurozone CPI release provided little additional direction, with headline HICP at 2.9% Y/Y and core at 2.5%, both matching expectations. ECB’s Rehn noted that wage growth and the outlook remain moderate, with no clear signs of second-round effects, while stressing the importance of keeping inflation expectations anchored. The stronger-than-expected current account also provided some background support, although the main driver remained the broader USD move.

Data:

  • European HICP Final (Jul YY) 2.9% vs. Exp. 2.9% (Prev. 2.8%).
  • European HICP Final (Jul MM) 0.2% vs. Exp. 0.2% (Prev. -0.1%).
  • European Core HICP Final (Jul YY) 2.5% vs. Exp. 2.5% (Prev. 2.4%).
  • European Current Account s.a (Jun) 35.1B vs. Exp. 22.1B (Prev. 25.1B).
  • European Current Account (Jun) 46.9B (Prev. -6.2B).


-

GREAT BRITISH POUND

GBP was firmer following the UK CPI release, with the data initially supporting Sterling, but demand faded into the late London trading period and GBP closed lower on the day, except against USD. The CPI release broadly reinforced the existing BoE narrative, with headline inflation at 2.9% Y/Y in line with expectations, while services inflation moderated to 3.4%. Core CPI was marginally firmer than expected at 2.6% Y/Y, but the overall release remained broadly consistent with the BoE’s July MPR forecasts.

Data:

  • UK CPI (Jul YY) 2.9% vs. Exp. 2.9% (Prev. 2.6%); CPI services 3.4% (Prev. 3.6%).
  • UK CPI (Jul MM) 0.3% vs. Exp. 0.3% (Prev. 0.1%).
  • UK Core CPI (Jul YY) 2.6% vs. Exp. 2.5% (Prev. 2.6%).
  • UK Core CPI (Jul MM) 0.2% vs. Exp. 0.1% (Prev. 0.3%).


-

AUSTRALIAN DOLLAR

AUD was broadly weaker on the day, with the Aussie failing to attract sustained demand despite a still-hawkish RBA backdrop. Wage growth eased to 3.2% Y/Y in Q2 from 3.3%, while the quarterly increase held at 0.8%, both in line with expectations. RBA Deputy Governor Hauser maintained a hawkish tone, stressing that inflation remains too high and that policy needs to reduce demand. He noted that he sees a slowdown rather than a recession and warned that rates would need to rise again if inflation fails to come down. However, NZD caught the broader bid following the US Treasury announcement, weighing on AUD


-
CANADIAN DOLLAR

 CAD was surprisingly weaker on the day, with the Loonie weighed by the broader market reaction to the US Treasury announcement, despite firmer oil prices and more constructive US-Canada trade developments. The move was somewhat counterintuitive given the supportive domestic and commodity backdrop. The temporary pause to the 50% tariffs on Canada through August 21st, confirmed by PM Carney, provided some relief on the trade front, while reports that the US is set to halve tariffs on Canadian steel and aluminium added further support. However, these positives failed to translate into sustained CAD demand on the day.

-

NEW ZEALAND DOLLAR

NZD caught a bid on the day on the back of broader USD weakness, with the Kiwi benefiting from the softer Dollar backdrop. On the data side, firmer domestic producer-price, with input prices rising 2.9% Q/Q in Q2 from 1.4% previously, while output prices accelerated to 1.6% from 0.8%.


-

JAPANESE YEN

JPY had a knee-jerk move higher on the back of the selloff in long-end US Treasury yields, with the initial reaction quickly pared back as the Yen struggled to sustain the move. JPY ultimately closed only marginally higher on the day.

Data:

  • Japanese Machinery Orders (Jun MM) 9.7% vs. Exp. 7.8% (Prev. -12.4%)
    Japanese Machinery Orders (Jun YY) 16.9% vs. Exp. 10.8% (Prev. -1.9%)


-
SWISS FRANC

CHF outperformed on the day and continued to carry momentum into the Asian session, supported by narrowing yield differentials following the US Treasury announcement and renewed safe-haven demand. The combination drove a sharp move lower in USD/CHF, which fell around 1.9%, highlighting the strength of the Franc’s move.