(Bloomberg) — For all the US Treasury’s efforts to stem rising borrowing costs, cooling inflation remains the most compelling way to lower bond yields, according to Goldman Sachs Group Inc.
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The effects of the Treasury’s plans to boost debt buybacks are likely to prove “relatively short-lived” without a shift that addresses the underlying US macro drivers, strategist Friedrich Schaper wrote in a note.
Long-term Treasury yields surged this week as investors demanded increased compensation to lend to a government with a growing debt burden. Inflation worries and competition from a wave of corporate borrowing also helped push the 30-year yield to levels last seen in 2007, before it traded little changed at 5.25% on Friday.
Treasury Secretary Scott Bessent said Thursday he’s prepared to expand efforts to buy back costlier debt and that the administration will be unveiling a new fiscal initiative to address the highest borrowing costs in years. This came a day after the Treasury Department announced it would increase “by at least double” the size of buybacks for longer-dated securities.
Schaper noted that the market is still putting “comparatively more weight on upside” risks in US yields, despite some encouraging fundamental news. Retail sales data has come in weaker than expected, employment numbers have disappointed and underlying US inflation was subdued in July.
“We think this leaves sustained accumulation of benign inflation data, which increase confidence in an on-hold baseline for the Fed and shift the skew of risk back, as the clearest route for lower yields for now,” Schaper wrote.
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