Washington steadied its own bond market, and everyone else's currency moved

The Treasury stepped into its own market

The US Treasury Department said on Wednesday it will more than double the amount of government debt it buys back from investors [1][2]. The maximum per operation rises from $2 billion to “at least” $4 billion [2]. It targets the 10-to-20-year and 20-to-30-year slices of the market. CNBC reports those have faced a buyers’ strike since late June - investors simply declining to bid [1]. The change runs from 9 September to 4 November [1][2].

Buying back your own bonds puts a large, willing buyer into a market where sellers had been winning. Prices rose, and yields, which move the opposite way, fell hard. The 30-year bond’s yield dropped about nine hundredths of a percentage point, to 5.196% [1], touching 5.187% at its low [2]. That was its biggest one-day fall since late June [2]. On Tuesday it had hit a 19-year high: Reuters puts that peak at 5.34%, while CNBC gives an intraday reading of 5.33% [2][8]. The 10-year yield, which sets the tone for US mortgages, fell to 4.647% [1], and stood at 4.6466% in early Asian trade on Thursday [4]. The S&P 500 rose 0.5% [3].

The dollar took the other side of the trade. The Bloomberg Dollar Spot Index fell as much as 0.7% to its weakest since mid-May, losing ground against every major currency including the yen [5]. Things that tend to rise when the dollar sags rose with it. Gold sat near a two-month high [7]. Bitcoin jumped almost 6% to above $69,000, a level last seen in early June [6]. Matt Mena, a strategist at the crypto research firm 21Shares, told Fortune the market read the buyback as “a quiet form of quantitative easing” [6]. That means a state buying bonds to hold borrowing costs down. The rush forced traders who had bet on a fall to buy back roughly $1.5 billion of Bitcoin. About $700 million of that came inside a single minute, which 21Shares believes may be the largest such scramble in Bitcoin’s history [6].

The relief travelled. Japan’s 20-year government bond yield fell 7.5 basis points to 3.700%, down from multi-decade highs, and its 10-year slid 4.5 [4]. A basis point is one hundredth of a percentage point. German and French bond futures rose too, implying lower yields there [4]. Nobody assumed it holds. Cusson Leung, chief investment officer at KGI, was blunt about it [4]. “The more the (U.S.) Treasury department wants to intervene, the more selling from institutional holders it will induce,” he said [4]. Taylor Nugent, senior economist at National Australia Bank, said the timing signalled that officials are alert to pressure in long-term borrowing costs [4]. It changed nothing about the underlying position, he said [4].

The dollar dropped, and Asia’s central banks had to answer

A weaker dollar is not a private American event. It lands on everyone who holds a different currency, and on Thursday morning three central banks gave three different answers to it.

China’s went first. The yuan had climbed to its strongest against the dollar in more than three years. So the People’s Bank of China set its daily reference rate at 6.7808 per dollar [9]. That was 598 pips weaker than the average forecast in a Bloomberg survey of analysts and traders [9]. A pip is a ten-thousandth of a unit; the gap was the bank’s way of saying the rise is fast enough. China can lean on the exchange rate like that and still run rates for its own economy. All 25 respondents in a Reuters survey expect its benchmark lending rates held for a 15th straight month [12]. That is 3.00% for one year and 3.50% for five, despite fresh economic weakness [12]. Citi analysts said the focus should stay on government spending rather than a rate cut [12].

Indonesia took the opposite route. Bank Indonesia kept its main rate at 5.75% on Wednesday as the rupiah stabilised, after raising it in both May and June [10]. Those earlier increases were not about Indonesian shops or Indonesian wages. They were about the currency.

India is watching the same pressure and has not yet moved. Minutes released Wednesday show its rate panel held the repo rate at 5.25% unanimously on 5 August, but flagged that hikes may be coming [11]. Higher oil prices from the Middle East war have stoked inflation worries and pressed on the rupee [11]. Consumer inflation was 4.45% in July, inside the 2-6% tolerance band but above the 4% target [11]. Governor Sanjay Malhotra warned of “de-anchoring of expectations” if food and fuel costs spread [11]. Deputy Governor Poonam Gupta said there is no room to cut and “a case for a rate hike may emerge” this financial year [11]. Reuters notes this sets India apart from Indonesia, the Philippines and other neighbours that have already tightened in response to war-driven currency swings [11]. Iceland, meanwhile, raised its key rate to 8%, though Governor Asgeir Jonsson signalled borrowing costs have probably peaked [13].

One arm of the US government pushed down. The other pointed up.

Hours before the buyback news, the Federal Reserve published the minutes of its 28-29 July meeting, and they read the other way [14][15]. “Many participants assessed that policy tightening would likely be necessary if inflation did not decline,” the record said [14]. “Several” were ready to raise rates at that meeting, up from “a few” in June [15][17]. Some added that financial conditions may not be tight enough to get inflation back to 2% [14].

The committee still voted 9-3 to hold its main rate at 3.5% to 3.75%, where it has sat all year [14]. It was the first time since 2016 that three officials dissented in the same direction [16]. All three were regional presidents: Beth Hammack of Cleveland, Lorie Logan of Dallas and Neel Kashkari of Minneapolis [14]. They wanted a quarter-point increase, arguing it would head off a steeper sequence of rises later [14].

The data since has not settled it. The Fed’s preferred inflation gauge fell 0.1% in June month-on-month but was still running at 3.7% a year [14]. Payrolls fell by 23,000 in July, while unemployment dropped to 4.1% - mostly because the workforce shrank, not because more people found jobs [14]. Chair Kevin Warsh has leaned toward patience [14].

There is a longer shadow behind all this. A $1.8 trillion deficit so far this year has pushed US national debt toward $40 trillion, tempering appetite for its bonds [8]. Anshul Pradhan, head of US rates research at Barclays Capital, wrote that private investors now hold 73% of the Treasury market [8]. That is up from roughly half a decade ago [8]. Price-sensitive owners behave differently from central banks: they sell.

Britain’s energy bills push prices up again

UK inflation rose to 2.9% in July from a 15-month low of 2.6% in June, its highest since March [18]. The main driver was a 13% rise in the household energy price cap set by the regulator Ofgem [18]. Economists had expected 2.9%; the Bank of England had forecast 2.8% [18]. Core inflation, which strips out energy and food, came in at 2.6% against a 2.5% forecast [18]. Finance minister John Healey said “Iran war inflation continues to impact prices here at home, but Britain’s economy is resilient” [18]. Sterling and government bond futures barely moved [18].

Cheaper fuel offset part of the rise. That was a knock-on from the easing of Middle East hostilities after the June memorandum of understanding with Iran [20]. But fuel has crept back up as hopes of a permanent settlement faded, and another Ofgem cap increase is expected in October [20]. Prime Minister Andy Burnham cut VAT from electricity bills early on [20]. The Bank expects that, plus a 2-pound cap on bus fares in England, to shave 0.1 percentage points off headline inflation [19]. Food prices have stayed unusually calm at 1.3% a year, down from 1.7% [20]. Liliana Danila, chief economist of the Food and Drink Federation, warned that extreme weather and supply disruption will keep pressing on ingredient costs [20].

The shopper is still split in two

Target lifted its annual forecast again after comparable sales grew 3.8%, beating an estimate of 2.5% [21]. Store traffic rose 3.6% and online comparable sales 8.7% [21]. It has cut prices on more than 10,000 items in a year, and priced about 95% of school supplies below last year’s levels [21]. Fortune reports Target received $994 million in tariff refunds in the quarter [22]. It will put the money into lower prices rather than send it back to shoppers [22]. Chief financial officer Jim Lee said only: “We have and will continue to invest in price” [21].

Big-ticket spending looks weaker. Lowe’s reported sales of $25.96 billion, up from $23.96 billion, but comparable sales rose just 0.2% [23]. Tariff refunds added 11 cents to its earnings per share [23]. It trimmed its full-year outlook to the bottom of its previous range and its shares fell about 2% before the open [23]. Walmart, the largest US retailer, reports before the bell and has said the gap between income groups is widening [24]. Analysts at Bernstein expect slower comparable sales as last year’s tariff-driven price rises drop out of the comparison [24].

Elsewhere

Christine Lagarde, president of the European Central Bank, told the World Economic Forum’s business council in Geneva that Europe’s post-war growth model is “eroding” [25]. It rested on three pillars, she said: expanding trade, cheap energy for manufacturing, and a rules-based order under a US security umbrella [25]. All three are weakening, with more than 2,500 trade restrictions imposed worldwide last year alone [25]. When dependencies can be weaponised, she said, money flowing into Europe is put at risk [25].

In Italy, Monte dei Paschi’s board is weighing bids for Banco BPM and Banca Generali [26]. It is a defence against an unsolicited 36-billion-euro takeover approach from Intesa, made in June [26]. The bank was rescued by the Italian state in 2017 and returned to private hands in 2023 and 2024 [26]. In the US, activist investor Nelson Peltz may take Wendy’s private [27]. US same-restaurant sales fell 7% last quarter, a sixth straight decline, with customer visits down 12.5% [27]. Chief executive Bob Wright told investors: “Traffic is down, our value proposition has slipped” [27]. And oil stayed part of the story throughout - Brent crude rose 1.1% on Wednesday to a three-week high as Middle East tensions held [28].