Citrini Research suggests that stronger coordination between the US Treasury and the Federal Reserve could push the government to lean more heavily on short-term debt issuance, thereby reducing the supply of long-term Treasuries and creating favorable conditions for a rally in 30-year bonds. The research firm argues that shifts in bank regulation, Treasury debt management, and Fed balance sheet policy are converging into what it calls a new "Treasury-Fed Accord."
Under this framework, the Fed would shrink its balance sheet while commercial banks expand their own. As the government cuts back on long-term bond sales and pivots toward more bill issuance, banks would absorb a greater share of short-term paper. Citrini notes that reduced long-term supply could help push long-term yields lower, and the firm is advising clients to position for 30-year bonds to outperform 5-year notes, meaning the yield spread between them should narrow.
Founded by James Van Geelen, Citrini gained market attention earlier this year for publishing a bearish scenario analysis centered on an AI-driven economic collapse. The firm's latest view comes on the heels of Treasury Secretary Scott Bessent's surprise announcement last week to expand the scale of long-term bond buybacks. Through what Bessent has described as a Treasury "twist operation," the government could effectively replace a portion of its long-term debt with more bills, easing market pressure.
Citrini wrote, "We anticipate that monetary and fiscal authorities, namely Fed Chair Kevin Warsh and Treasury Secretary Scott Bessent, have already reached a consensus on a framework." The firm states that this framework aims to achieve multiple objectives simultaneously, including shrinking the Fed's footprint in financial markets, improving fiscal sustainability, and stimulating economic growth by easing constraints on banks so they can lend and invest more.
Warsh is slated to deliver a major speech at the Jackson Hole annual symposium on Friday. He has long advocated for reducing the Fed's balance sheet and has established a working group to evaluate the size and maturity structure of its holdings. Warsh has previously referenced a new "Fed-Treasury Accord" but has not provided specifics. The original 1951 accord granted the Fed greater independence and ended the policy of capping Treasury yields to keep government borrowing costs low.
Citrini expects the spread between 5-year and 30-year Treasury yields to tighten over the next three months, leading up to the Treasury's next quarterly refunding announcement on November 4. "By then, we believe the Treasury's twist operation will become more clearly recognized by the market," the firm said.
Looking further out, however, Citrini remains bearish on long-dated Treasuries. The firm believes Bessent's strategy of keeping nominal economic growth above government borrowing costs could result in bondholder returns lagging inflation. Meanwhile, lower yields may also encourage more borrowing and further amplify inflationary pressures.
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