The Ministry of Finance took steps to reduce long-term interest rates, and gold and Bitcoin rose sharply in response
Author: Little Cake
Original title: Bond Market Fright, How Can a Buyback Detonate Gold and Bitcoin?
On August 18, the US 30-year Treasury yield hit 5.337% intraday, a new high since April 2007. The last time this number appeared on the screen, the iPhone had just been launched, and Lehman Brothers was still a Wall Street giant.
In less than 24 hours, the Ministry of Finance was in action.
On August 19, the US Treasury Department announced that it would at least double the scale of liquidity-supported repurchase operations for long-term nominal treasury bonds, raising the upper limit of a single operation from 2 billion US dollars to no less than 4 billion US dollars, covering the two ranges of 10 to 20 years and 20 to 30 years, effective September 9 and continuing until November 4.
Within minutes of the news, the 30-year yield plummeted from around 5.337% to 5.192%, a drop of about 15 basis points. Gold surged more than $125 to $4,487 per ounce in a single day, a new high since June 4. Bitcoin pulled up 8.7% from an intraday low of $64,112 to $69,700, approaching the $70,000 mark for the first time in two months. Ethereum rose nearly 19%, and the crypto market liquidated more than $20 billion in 24 hours, of which $1.44 billion was liquidated by bears.
How did a buyback cause a huge shock in the global market?
What is a buyback?
Treasury buybacks and the Federal Reserve's QE are two different things.
QE is when the central bank prints money to buy bonds, directly injecting new liquidity into the market. However, the Ministry of Finance buybacks up old bonds that the Ministry of Finance uses money from its own accounts to buy back those “old and no one wants to trade”. The purpose is to renew liquidity to the market so that market makers are not “priceless” in the long-term treasury bond market.
For example, there is a used car market in your neighborhood, but recently no one is buying used cars. Car dealers have stocked up a bunch of used cars and can't sell them, and the price of new cars is being dragged down. At this point, the property came forward and said, “Used cars will be purchased uniformly by the property; at least this much will be collected. As a result, car dealers had cash in their hands, and the liquidity in the new car market also slowed down.
The Ministry of Finance is doing this “property” job. It is buying back “off-the-run” bonds, that is, old securities that are no longer the latest issue and have a scarce trading volume. After institutions that sell old coupons get cash, they can reallocate them to new coupons with better liquidity. As a result, the trading price spread in the entire long-term market narrows, and transaction friction is reduced.
The Ministry of Finance did not create money out of thin air. The source of funds for the repurchase was the Ministry of Finance's General Account (TGA), and the TGA money came from taxes and newly issued short-term treasury notes. This means that while long-term supply is declining, short-term supply is increasing, and the total amount of debt has not changed; only the term structure has changed.
Why are yields out of control?
To understand the urgency of this repurchase, we need to go back to what the bond market has experienced in the past five months.
The war in Iran was the trigger. After the US-Iran conflict broke out in late February, passage through the Strait of Hormuz was blocked, and Brent crude oil climbed all the way from the pre-war range of $70 to $91 recently. The sharp rise in energy prices directly boosted inflation expectations, while the Federal Reserve kept interest rates unchanged (3.5% to 3.75% range) at the July interest rate meeting. Three members of the committee even voted against raising interest rates, and the market began to set prices “higher for longer.”
But the rise in yield was not only driven by inflation. Fiscal deficits are a deeper structural strain. The monthly deficit in July reached US$432.3 billion, the largest monthly gap since March 2021. The annual deficit is likely to be over $2 trillion, accounting for about 6.4% of GDP. The total national debt is close to $40 trillion, and the public holdings are about to reach 100% of GDP.
More importantly, over the next 12 months, $10 trillion of treasury bonds will need to be rolled over. This means that the Ministry of Finance must continue issuing a large number of new bonds in an already indigested market. The long-term market began to show signs of a “buyers' strike” in late June. The winning bid yield for both auctions set new records for more than ten years: the 10-year auction interest rate is 4.683%, and the 30-year auction interest rate is 5.216%.
When the yield hit 5.337% on August 18, US Treasury Secretary Bezent's window of choice was already very narrow.
Bezent's undercard
Perhaps the biggest significance of this buyback is to let the market see Bezent's bottom card.
On the face of it, the Ministry of Finance said, “Market participants have given a large number of high-quality offers, so expand the scale of operations to provide better liquidity support.” But what the market heard meant something completely different:The US government has a pain threshold for long-term returns, and this pain threshold has just been revealed.
The Bank of Japan's YCC clearly announces a yield cap and then defends it with unlimited purchases. Bezent didn't draw a line, but he intervened at 5.34%, with a similar effect. It directly told the market that if long-term interest rates continue to soar, the Ministry of Finance will use more tools.
For traders, this signal is far more important than the size of the repurchase itself. A single $4 billion repurchase operation is insignificant in a treasury bond market with an average daily trading volume of over $800 billion. But it conveys the policy intent:There is a hidden ceiling on long-term interest rates.
So, the market took action.
Gold and Bitcoin soar
Gold rose by $125, or 3.5%, and the logical chain behind it is clear:
The Ministry of Finance lowers long-term yields → real interest rates (nominal interest rate minus inflation expectations) fall → opportunity cost of holding gold decreases → gold prices rise.
But the deeper logic is the strengthening of the “finance-led” narrative.
When a government with an annual deficit of $2 trillion and total debt of $40 trillion begins to actively interfere with the yield curve, the market naturally asks: Where does the money come from? The source of the repurchase funds is the TGA account, which is ultimately replenished by issuing short-term treasury notes.
Peter Schiff criticized on X: The Treasury is buying long-term bonds that private investors don't want to hold, and the money to buy is ultimately needed by the Federal Reserve to generate.
Does this constitute quantitative easing in disguise? Strictly speaking, no, because the Federal Reserve is not directly involved at the moment. But if the supply of short-term treasury notes continues to expand, sooner or later the Federal Reserve will have to face a choice: whether to allow short-term interest rates to be boosted (increase fiscal interest expenses), or to absorb excess supply by buying short-term treasury bills (essentially expanding the balance sheet)?
Whichever path you take, it's good for gold. Gold pricing is the ultimate proposition that “all roads eventually lead to more government intervention”.
Bitcoin's logic overlaps with gold, but it adds a mechanism unique to the crypto market: going short.
Before the buyback news was announced, Bitcoin had been fluctuating in a slump in the $64,000-$65,000 range for several weeks, and a large number of short positions were piled up in the market. When macroeconomic benefits suddenly came to an end, the rapid rise in prices triggered forced liquidation of bears. The $1.44 billion short liquidation was completed within an hour, creating a self-reinforcing upward spiral.
On the same day, the SEC also announced a proposed new regulatory framework for the issuance of crypto assets. The two benefits were superimposed on the same trading day, forming a perfect bullish catalyst.
However, Bitcoin is still 45% away from its all-time high of $126,000, which was set in October last year. VanEck's capitulation indicators show that 8 out of 12 indicators have already been triggered, suggesting that the market may be at the end of the decline. Whether this rebound is a technical rebound in a bear market or the starting point of a new cycle depends on a core variable:Can Bezent really hold back long-term interest rates?
The bottom line of 5.337% has already been seen by the market. Next, the market will test it again and again.
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