Deutsche Bank analyst warns of risks to the dollar from US Treasury actions
Increased buybacks of long-term US government bonds and Japan’s use of the FIMA mechanism may be signs of “soft” financial repression aimed at containing US Treasury yields. This assessment was made by Deutsche Bank’s head of foreign exchange research, George Saravelos, Fortune reports.
US Treasury Secretary Scott Bessent presented a plan to increase buybacks of long-term bonds after yields on 30-year securities reached their highest level in nearly 20 years. Saravelos believes that bond buybacks and encouragement to use FIMA for foreign exchange reserves are aimed at limiting yields at the long end of the US yield curve.
The FIMA mechanism for Japan
Several weeks earlier, the United States and Japan jointly took measures to support the yen — for the first time in three decades. To do so, the United States sold euros instead of dollar-denominated assets, avoiding sales of Treasury securities that could have pushed their yields even higher.
Japan also refrained from selling US government bonds and instead used the Federal Reserve’s Foreign and International Monetary Authorities Repo Facility mechanism. According to the publication, this allowed Japan, the largest holder of US government debt, to borrow dollars against its existing Treasury securities as collateral and obtain limited liquidity.
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Assessment of consequences for the dollar
Saravelos warned that containing Treasury yields could shift pressure onto the dollar. In his assessment, if the market price of US government bonds is not allowed to fall, the value of such securities for foreign investors in currency terms could adjust through a weaker dollar.
The analyst expects markets to watch the Federal Reserve’s response. He noted that Bessent’s steps effectively ease financial conditions, which would normally prompt the Fed to pursue tighter policy. Saravelos added that if Fed Chair Kevin Warsh does not take bond buybacks into account as a factor easing financial conditions, this could become an additional negative factor for the dollar.
After the announcement of bond buybacks, markets stepped up bets on the so-called debasement trade: gold and bitcoin prices rose on expectations of further dollar depreciation. According to Fortune, the US federal budget deficit could reach $2 trillion this fiscal year, while annual debt-servicing costs already stand at $1 trillion.
