Sunset Market Commentary

Markets

The US Treasury today announced that it is increasing, by at least double, the size of liquidity support buyback operations for longer-dated nominal coupon securities (10y to 20y and 20y to 30y). The current maximum size of $2bn per operation will be at least $4bn per operation, effective September 9 and in effect for the remainder of the current refunding quarter (through Nov 4). This will apply to 7 more buyback operations after which the Treasury will announce more on future sizes at the next Quarterly Refunding statement. “The increase in buyback operation sizes reflects Treasury’s desire to provide greater liquidity support in longer-dated nominal sectors where there is consistent strong sponsorship from market participants, as evidenced by the significant volume of high-quality offers Treasury routinely receives in longer-dated buyback operations.” The Treasury launched its buyback program in May 2024. It purchases off-the-run nominal coupon securities and TIPS from primary dealers, financed by simultaneously issuing new on-the-run securities. The goal is to retire illiquid older debt and replace it with more actively traded benchmarks, improving overall market depth. US Treasuries rallied at the long end of the US curve which bull flattens. Daily changes on the US yield curve range between -0.2 bps (2-yr) and -8 bps (30-yr). On FX markets, the announcement pushed EUR/USD beyond the 1.16 resistance area with EUR/USD currently trading at 1.1650 for the first time since early June. US equity markets opened stronger, gaining up to 0.5% (Nasdaq). While the higher volumes are clearly no game-changer, they signal that “big brother” (Treasury Secretary Bessent) is watching the long end of the curve. The end-of-July joint efforts with Japanese authorities to stem JPY-weakness were also partially inspired by worries about the long end of the curve. Bessent wanted to avoid the situation where Japan accelerated selling of US Treasury holdings to fund FX interventions. The US 30-yr yield moved above 5.3% for the first time since 2007 earlier this week. The US 10-yr yield flirted with 4.75% for the first time since January of last year. The US administration is focused on interest rates as election pledges to lower mortgage rates risk backfiring at upcoming US-midterm elections. Apart from the political aspect, elevated interest rates significantly weigh on the US budget deficit. According to the CBO, federal interest rate costs will hit 3.3% of GDP this year (and head to 4.6% of GDP in 2036) after averaging 2.1% over the past half-century. The forecast assumes a 4.1% 10-y bond yield.

The final July EMU CPI figure came in slightly higher than initially reported (2.95% Y/Y for headline and 2.47% Y/Y for core), following an upward revision of energy prices from 10% YoY to 10.3% YoY. Given the recent increase in oil prices, we have upgraded our August headline inflation nowcast from 3% to 3.2%, while the core inflation estimate remains around 2.4%.

News & Views

Poland’s prime minister Tusk announced an overhaul to the country’s income tax regime to ease the burden on middle-income earners today. The government will introduce a new 24% rate, sitting in between the existing 12% and 32% brackets. The threshold for the lowest rate will be lifted from the 2022 level of PLN 120 000 to PLN 130 000 with the 24% rate applicable to earnings between PLN 130 000 and PLN 150 000. Tusk said the changes will come into effect next year and would benefit around 3.5 mln Poles. A 3 ppts increase in the corporate income tax rate to 22% for companies with annual revenues exceeding €50 mln should fund the measure. Banks, which already pay elevated rates (30% this year) due to windfall-tax measures imposed earlier, are not affected by the overhaul.

Less than a month ahead of the Swedish general elections (September 13), the country’s center-left opposition is holding a 10 percentage point lead over the right-wing coalition. The four left-leaning parties had a combined 53.9% backing, giving them an estimated 196 seats. This compares to the 43.9%, or 153 seats, the ruling coalition scored. Public broadcaster SVT, the survey-taker, said no government has ever bridged a gap this wide in such short time, making change all but certain. The Social Democrats maintained their position as the biggest party, garnering 30.5% support, up 0.2% ppts from the 2022 election result. That makes its leader, Magdalena Andersson, the most likely candidate to take over the baton from Sweden’s right-wing Moderates’ Ulf Kristersson as prime minister.