On Monday, we talked about the rise in government bond yields and the related vulnerabilities in sovereign debt markets (most acute in Europe).
This morning, the U.S. Treasury addressed the U.S. government bond market, by saying it will "provide greater liquidity" to support the long end beginning next month.
The 30-year fell 10 basis points to 5.19%, and yields were down globally on the news.
Let's talk about the significance of this move by the U.S. Treasury Secretary, Scott Bessent.
Remember, as we discussed in these daily notes, when Kevin Warsh was sworn in as the new Fed Chair back in May, the "Warsh doctrine" went into effect: a smaller balance sheet, less telegraphing, and structural reform to break the entanglement of the Fed with government financing.
And with that, under a Warsh-led Fed, the fiscal dominance funded by the Fed for eighteen years should give way to fiscal discipline, with crisis management given back to the Treasury.
We just saw it this morning.
The Treasury stepped in to support the long end of the bond market. That's the job quantitative easing used to do. For fifteen years, when long-dated Treasuries needed a buyer, the Fed was that buyer.
Those days are over. Warsh has been explicit that the balance sheet borders on fiscal policy and that he wants the Fed out of that business.
So the backstop didn't disappear. It moved to the Treasury.
And this is now the second time we seen evidence of the handoff.
Emergency dollar liquidity for foreign central banks used to run through Fed swap lines, extended automatically to allies. Three weeks ago the Treasury intervented to support the value of the yen and asked the Fed to expand a facility that lends dollars only against Treasuries already held.
And crisis management at the long end used to run through Fed asset purchases. Today it runs through Treasury buybacks.
So, the Fed and the Treasury are reorienting dollar policy.
On that note, one of the biggest movers on the day in global markets was gold.
Earlier this month we talked about the 4.1% jump in gold — the magnitude of which was matched or exceeded in only three episodes of the past 7 years.
And as we discussed, all three of the outsized rises in gold (going back seven years) had one thing in common: change in the architecture of global dollar liquidity (who supplies the dollars, and on what terms).
Today gold jumped 4.3% — another rise of rare magnitude.
Another big trading session, and again, it came with a change in the architecture of dollar liquidity. Not an inflation print, not a war headline, but the Treasury taking over a function the central bank used to perform.
