A quietly developing policy alignment between the U.S. Treasury and the Federal Reserve is increasingly being viewed as a potential catalyst for a sustained rally in long-dated U.S. Treasuries.
In its latest report, the increasingly prominent research firm Citrini Research argues that the Treasury and the Fed are moving toward a more synchronized policy framework. The central thesis involves shifting the government's borrowing focus toward short-term bills while reducing the supply of long-term bonds, thereby paving the way for a rally in 30-year Treasuries. Citrini refers to this framework as a new version of the "Treasury-Fed Accord" and has advised clients to position for 30-year Treasuries to outperform 5-year notes, essentially betting on a narrowing of the yield spread between the two maturities.
Founded by James Van Geelen, Citrini first gained widespread attention earlier this year with a dystopian report depicting an AI-driven economic collapse, which quickly elevated it to one of the most-watched independent research shops in the market.
The immediate trigger for this assessment was Treasury Secretary Bessent's surprise announcement last week to significantly expand buybacks of long-dated bonds. Under what Bessent has termed a "Treasury twist," the government could replace a portion of its long-term debt with short-term bills, aiming to alleviate market pressure stemming from 30-year yields climbing to nearly two-decade highs. Citrini anticipates that within the next three months—around the time of the Treasury's next refunding announcement on November 4—the yield spread between 5-year and 10-year notes will narrow meaningfully as the effects of the "twist" become fully apparent to the market.
The New Accord Framework: Fed Shrinks, Banks Expand, Long-End Supply Contracts
Citrini's core argument is built on three interlocking policy variables: bank regulatory reform, a shift in Treasury debt management strategy, and a pivot in the Fed's balance sheet policy.
The firm believes that under the new framework, the Fed will continue to shrink its balance sheet while commercial banks expand theirs to absorb more short-term bills. Simultaneously, the Treasury will shift its issuance focus from longer maturities to shorter ones, directly reducing the market supply of long-dated bonds. This contraction in supply would provide support for lower long-term yields.
Citrini wrote: "We expect that monetary and fiscal authorities—Fed Chair Warsh and Treasury Secretary Bessent—have already agreed on a framework." The framework is designed to achieve multiple objectives simultaneously: reducing the Fed's footprint in financial markets, improving fiscal sustainability, and stimulating economic growth by easing banks' lending and investment capacity.
Warsh's Role: Jackson Hole Speech in the Spotlight
Fed Chair Warsh is a key figure in this narrative. According to Bloomberg, Warsh is scheduled to deliver a major speech on Friday at the annual Jackson Hole symposium. He has long advocated for shrinking the Fed's balance sheet and has established a dedicated task force to review its size and the duration profile of its holdings.
Warsh has previously spoken publicly about the concept of a new "Treasury-Fed Accord" but has not disclosed specific details. Citrini notes that the original 1951 accord granted the Fed greater independence and ended the policy of capping bond yields to keep government borrowing costs low. The new version, however, points in a different direction, focusing more on policy coordination rather than a reaffirmation of independence.
Banking Sector Benefits: The "Biggest Winners" of Liquidity Rule Reform
Citrini believes that reforms to liquidity regulations will be an important complement to this framework. Relaxing liquidity requirements would allow banks to hold less cash, thereby freeing up more capacity for lending. The firm has identified four major banks as the "biggest winners": Bank of America Corp (NYSE: BAC), U.S. Bancorp (NYSE: USB), Truist Financial Corp (NYSE: TFC), and Capital One Financial Corp (NYSE: COF).
Using Bank of America as an example, Citrini points out that the bank aggressively purchased low-rate mortgage-backed bonds during 2020-2021, and subsequent rate hikes have eroded the book value of those holdings. "Because liquidity rules value bonds at fair market value, the buffer has narrowed," forcing the bank to turn to securities-backed funding.
Citrini argues that this type of borrowing "is a drag—costly and subject to size limits imposed on large banks." Should regulatory rules be adjusted, the bank could "abandon this type of lending and return to a growth trajectory," thereby narrowing the valuation discount relative to its peers.
Medium-Term Bullish, Long-Term Concerns Remain
Notably, Citrini's optimistic view on long-dated Treasuries has a clear time boundary. The firm expects the window for yield spread compression to be concentrated in the next three months, around the Treasury's November 4 refunding announcement.
However, looking further out, Citrini maintains a bearish stance on long-dated Treasuries. The logic is that Bessent's strategy of keeping nominal economic growth above government borrowing costs will cause bondholders' real returns to lag inflation. Additionally, lower yields could stimulate more borrowing activity, further exacerbating inflationary pressures.
Comments