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Treasury expands 10- to 30-year buybacks to pull down the long end

The announcement lifted tax-exempt bonds less than Treasuries over the week ended August 19, with the ICE BofA Municipal Master Index down 0.39%.

Reported · Written up by our desk · Municipal Bonds

The U.S. Treasury announced August 19 that it would at least double its purchases of 10- to 30-year bonds, aiming to reduce yields on the long end while funding continues at the front of the curve. ETF Trends said the closest historical comparison is the Federal Reserve’s 2011 “Operation Twist,” with the key difference that this twist is being carried out by the issuer rather than the central bank.

Yields moved quickly after the plan was announced, according to ETF Trends. Over the week ended August 19, 10-year and 30-year Treasury yields fell 3 basis points and 5 basis points, respectively, while 10-year and 30-year AAA MMD munis cheapened by 7 basis points.

That divergence hurt tax-exempt investors, ETF Trends reported. The ICE BofA Municipal Master Index returned -0.39% for the week, which the outlet said left it about 80 basis points behind Treasuries, corporates, and taxable munis, and it noted August month-to-date performance of 0.41% trailed those sectors by more than 30 basis points.

ETF Trends framed the lag in munis versus Treasuries as potentially supportive for duration positioning, citing near-record short positioning in ultra-long Treasury futures that could unwind as a result of the catalyst. The outlet also warned that valuation is a key area to watch, pointing to muni-to-Treasury ratios of 61.2% in 3 years, 71.2% in 10 years, and 87.0% in 30 years, and said the muni case depends more on rate direction and curve shape than spread compression.

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