For many years, the market spoke of a ’Greenspan Put’ in equity markets, where investors were protected from much lower stock prices by the assumption that the Fed would . Yesterday’s intervention in the Treasury market suggests the recent rise in longer-dated yields has touched a raw nerve. Risk assets are enjoying this more activist US Treasury
USD: Investors Greet a More Interventionist Treasury
While increasing liquidity buy-back operations by $2bn might seem like rearranging deckchairs on the Titanic given the US national debt of $40tr, yesterday’s intervention by the US Treasury has been warmly greeted by investors around the world. As ING’s Padhraic Garvey writes, this unscheduled announcement tells us the Treasury’s displeasure with the recent sell-off at the long end of the bond market. Clearly, a more structural solution such as fiscal consolidation is required for a more sustainable recovery in the bond market, but news that the US Treasury is going to be more vigilant about the long end has been welcomed.
The 10bp drop in longer-dated US yields has lifted equities and seen the dollar soften, especially against high-beta currencies such as the , and . The Bessent Put – or someone to watch over the US Treasury market – reduces one of the key threats to risk assets this summer and should see carry trade strategies remaining popular.
At the same time, the minutes of the July FOMC meeting were not particularly hawkish and short-dated US yields actually fell 5bp after the release. This all leaves the dollar in a flat/lower pattern consistent with a ’Risk-on, Dollar-off’ investment environment – EMFX typically does well at times like these.
For today, the US data calendar is light, and we will hear from two Federal Reserve hawks: Mary Daly, who voted for a hike in July, and Alberto Musalem, a non-voter.
unexpectedly broke down from its 99.40-100.00 range yesterday and can probably drift lower to 98.65. The next stop would be 98.00 should risk assets build another leg higher on this more activist US Treasury.
EUR: Pro-Cyclical Currencies Get a Boost
broke higher yesterday on the US Treasury news, which could usher in a slightly more encouraging, or at least stable, investment environment. Ever-higher natural gas prices in Europe remain a worry, but investors are thinking about another bearish dollar leg emerging, with EUR/USD playing its part.
Behind the scenes, foreigners are also buying a lot of eurozone debt and equities. Data released by the European Central Bank yesterday showed that foreigners have bought around €1.1tr of eurozone securities over the last 12 months. And June saw the largest ever monthly purchases of debt at €200bn. Thus, the bullish euro narrative of diversification away from the US remains present.
Yesterday’s US intervention has brought EUR/USD close to our end-September target of 1.17. Resistance at 1.1700 may be a tough nut to crack in the short term, but if so, 1.1790 beckons. Support may be found as close as 1.1650/60. Also, a reminder that we consider European asset managers underhedged on their US investments.
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