Treasury’s ramped-up bond buybacks soften the U.S. dollar and boost the gold price – Julius Baer

The Swiss private bank said the recent U.S. Treasury announcement that it will at least double the amount of long-dated Treasuries it buys back as of September came as a surprise.

“The idea is that if the government buys more bonds, bond prices should rise and their yields should fall,” the analysts said. “Lower yields would reduce borrowing costs across the economy.”

They noted that while the announcement resulted in a meaningful drop in long-term Treasury yields, this has since been largely reversed. “It is too early to categorise this decision, but it is clear that a lot more will be required to push Treasury bond yields meaningfully lower,” they said. “In our view and in the absence of monetary policy easing anytime soon, more favourable fiscal announcements would likely be needed in order to cause a meaningful drop in yields, although this still appears unlikely.”

Julius Baer believes the Treasury’s yield curve control signals the return of the debasement trade.

“The US Treasury's decision to increase buy-backs of long-dated government bonds has contributed to dollar weakness by helping to limit long-term bond yields, reducing part of the yield advantage that has attracted global capital into US assets,” the analysts wrote. “This has revived discussion around the so-called ‘USD debasement trade’, which reflects concerns that a combination of lower yields, a weaker dollar and rising debt levels could gradually erode the dollar's purchasing power. In response, investors have renewed their focus on assets that may help preserve value over time.”

“Against this backdrop, investors have increasingly turned to gold and silver as potential stores of value, with the outlook remaining particularly constructive for gold.”

The analysts explained that Treasury's bond purchase program supports precious metals by limiting upward pressure on long-term bond yields while contributing to a weaker U.S. dollar.

“Lower yields reduce the opportunity cost of holding non-income-generating assets such as gold and silver, while a softer dollar tends to make them more attractive to investors,” they said. “Although the move is not viewed as the start of formal yield-curve control, it has improved the outlook for precious metals by reducing downside risks and supporting higher fair-value estimates.”

After briefly dipping below $4,400 per ounce overnight, spot gold has stabilized comfortably above that level, last trading at $4,437.05 per ounce for a loss of 0.40% on the session.

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