Besenet's intervention has begun to show results as the spread of U.S. Treasury yields has significantly narrowed. Long bond traders are betting on further declines in yields.

Last week, U.S. Treasury Secretary Janet Yellen unexpectedly announced an expansion of the long-term Treasury bond buyback program, sparking intense debate on Wall Street about whether this policy can genuinely lower long-term financing costs in the U.S. Despite long-term Treasury yields remaining close to multi-year highs, the latest market indicators show that the Treasury's intervention has begun to take effect, with traders becoming increasingly reluctant to counter the policy power that the market has dubbed the Yellen put option. Since Yellen announced the expansion of the buyback program, U.S. Treasuries have significantly outperformed interest rate swaps of similar maturities, with the yield spread between 30-year Treasuries and swap rates narrowing to the lowest level since February of this year. Meanwhile, benchmark Treasury yields experienced a brief oscillation following the policy announcement, but have now started to gradually decline. The Yellen put option begins to take shape, with the market hesitant to short long bonds Last week, Yellen announced that the U.S. Treasury would at least double the scale of long-term Treasury bond buybacks to alleviate market pressure on long-term Treasuries. Jason Williams, the U.S. interest rate strategy head at Citigroup, stated that the new Treasury policy effectively provides a certain level of safety net for long-term Treasuries, thereby improving the risk-reward structure for holding long bonds. He described this policy support as a new Treasury put option, suggesting that when long-term Treasuries face severe sell-offs and yields rise quickly, investors start to expect that the Treasury may intervene by increasing the scale of buybacks. Williams pointed out that the measures, including the expansion of bond buybacks and recent interventions regarding the yen, demonstrate Yellen's willingness to utilize various policy tools to achieve her objectives. Media reports on Monday indicated that the Treasury might even tap into its Treasury General Account (TGA) funds held at the Federal Reserve to finance further increases in long-term Treasury bond buybacks. This news further boosted the Treasury market, while declining oil prices also helped alleviate inflation and yield pressures. Although long-term financing costs remain close to multi-year highs, and many structural factors pushing global long-term rates higher have not disappeared, the recent market performance implies that, without Treasury intervention, Treasury yields could currently be at even higher levels. The options market clearly shifts to bullish long-term Treasuries The impact of Treasury policies is also quite noticeable in the options market. Over the past week, options linked to long-term U.S. Treasury bond futures have shifted significantly towards bullish positions, with demand for call options rapidly increasing relative to put options. In contrast, the options skew for short-term Treasury futures remains close to neutral levels observed over the past few months, indicating that current market attention concerning policy intervention is primarily focused on the long end of the yield curve. Alex Manzara, a derivatives broker at R.J. OBrien & Associates, noted that the real trading opportunities are currently concentrated in the long end of the yield curve. He suggested that if there exists a current fear in the market, it is actually a concern that further government intervention could lead to a sudden sharp decline in long-term yields. In other words, while investors previously primarily worried about ongoing sell-offs of Treasuries and further spikes in yields, with the Treasury's clear entry into the market to buy long bonds, some traders have started to fear that continuing to short long bonds may face sudden policy escalation. Even as some market participants, including billionaire investor Stanley Druckenmiller, believe Yellen's intervention is a misstep, traders must confront the reality that there is now a financially powerful buyer in the market who may continue to expand their purchasing scale. The yield spread between 30-year Treasuries and swaps has narrowed to the lowest level since February Another important indicator reflecting the effects of the Treasury's policy is the yield spread between Treasury yields and swap rates. In recent years, as the U.S. government has massively issued Treasuries, the supply of U.S. Treasuries has rapidly increased, causing Treasury yields relative to swap rates to continue rising. This change has also prompted a large number of hedge funds to engage in related spread trades. Federal Reserve researchers estimate that hedge fund positions in this area have surged from less than $50 billion in 2022 to a record $305 billion last year. Although Treasury yields are still significantly higher than swap rates, the gap has begun to narrow following Yellens announcement to expand buybacks. Specifically, the yield spread between 30-year Treasuries and swaps has fallen to the lowest level since February this year; the 10-year spread has also narrowed by about 3 basis points, currently around 38 basis points. Padhraic Garvey, head of NY region research at ING, believes this narrowing spread reflects that investors are considering a possibility: if the Treasury deems the buyback policy effective, it may widen the buyback scale again and again in the future. JPMorgan survey shows investors reducing neutral positions Investor positioning has also begun to change. A Treasury client survey conducted by JPMorgan on August 24 revealed that investors simultaneously increased both long and short positions, while the proportion of neutral investors plummeted from 67% to 54%, the lowest level since May 26. This indicates that as the Treasury intervenes in the long bond market and uncertainty regarding future Fed policies persists, investors are becoming more proactive in choosing their direction. The SOFR options market has also seen a surge of new positions. Outstanding contracts at certain key strike prices have noticeably increased, reflecting traders re-positioning themselves in expectation of future U.S. interest rate movements. Treasury yields remain at multi-year highs, and the fiscal deficit issue has not disappeared However, the recent improvements brought about by Treasury buybacks have not altered the reality that long-term financing costs in the U.S. are still near historical highs. The 10-year Treasury yield, a focal point during the Trump administration, currently remains above 4.6%, close to its highest level since early 2025; the 30-year Treasury yield is nearing 5.2%, not far from its highest level since 2007. Libby Cantrill, head of public policy at Pacific Investment Management Company, pointed out that while implementing buybacks at the long end of the yield curve may technically help lower yields, the fundamental reasons driving long-term Treasury yield increases have not changed. One of the most pressing issues is that the U.S. structural fiscal deficit continues to be at a high level. To finance its massive government debt and expenditures, the U.S. Treasury still needs to consistently supply a large amount of Treasuries to the market. Thus, expanding buybacks can alter short-term supply and demand dynamics but cannot eliminate the fiscal fundamentals that lead to rising long-term yields. Overall, Yellens Treasury bond buyback plan is having a more pronounced market impact than many on Wall Street initially expected. The narrowing of Treasury and swap spreads, the bullish shift in long bond options markets, and traders' apprehension towards further policy interventions all indicate that the so-called Yellen put option is gradually forming. However, questions remain about how long this policy support can truly last. As long as the fiscal deficit and Treasury supply pressures in the U.S. show no significant relief, the Treasury currently appears to be setting a policy safety net for the long-term Treasury market, rather than fundamentally reversing the trend of high long-term yields.