U.S. Treasury yields are little changed in early European trade as investors weigh prospects of the Treasury buying back more long-dated bonds and the government's measures designed to isolate Iran economically.
Reports emerged Monday that the Treasury might deploy its nearly $1 trillion general account to finance the increased buybacks of long-end securities it announced last week.
This comes after the Treasury last week doubled its buyback of long-end securities to more than $4 billion per operation from $2 billion.
"The report does highlight that [Treasury Secretary Scott] Bessent has more tools to control the long end of the curve and the Treasury can come up with more creative measures," Jefferies' global economist Mohit Kumar said in a note.
However, higher deficits and risks of prolonged inflation keep Jefferies wary of buying long-dated Treasurys, he said.
Investors were also cautious ahead of the Kansas City Federal Reserve's annual symposium later this week, where Fed Chairman Kevin Warsh is expected to address plans to tackle inflation.
The 10-year U.S. Treasury yield last traded flat at 4.701% while the 30-year yield was steady at 5.229%, according to Tradeweb. The 10-year German Bund yield edged up 0.2 basis points to 3.254%, while the 10-year U.K. gilt yield rose 0.2 basis points to 5.055%.
The price of Brent crude oil fell 0.8% to $91.47 a barrel.
Bessent on Monday announced new sanctions aimed at Iran, warning that countries and companies that do business with the country will face retaliation.
"The geopolitical escalation adds a new layer of complexity heading into Jackson Hole," said Jesper Fjarstedt, senior analyst at Danske Bank.
He expects that Warsh will avoid giving any definitive policy signals. He is also unlikely to address Treasury's market intervention directly.
The absence of a clear forward guidance leaves the Fed's reaction function unusually uncertain, said Gabriele Foa, global credit portfolio manager at Algebris in a note. This uncertainty is contributing to a steeper U.S. Treasury curve, caused by long-dated yields staying elevated.
"That runs somewhat against what Bessent has been trying to achieve through lower long-term yields and may point to less coordination between the Fed and the Treasury than some market participants had expected," he said.
Any buybacks of long-dated debt will increase the U.S. Treasury's risk profile, Christoph Rieger, head of rates and credit research at Commerzbank said.
"The Treasury will soon be facing an interest bill of above $100 billion each month," he said in a note. Longer term, the measures need to be accompanied by a coherent credible fiscal consolidation plan to keep yields down.
ING's Padhraic Garvey, regional head of research for Americas, said that an expansion in the size of long-end buybacks could help long-dated bonds, but the use of the general account to finance them won't necessarily have a material impact.
"The key messaging here is not on how the buybacks are financed, but on the threat that the buybacks could be increased again," he said.
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