Deutsche Bank Likens Doubled Treasury Buybacks to 'Operation Twist', Warns of Dollar Weakness

The U.S. Treasury's surprise decision to significantly increase its purchases of long-term government debt is functionally similar to the Federal Reserve's historic 'Operation Twist' and could lead to sustained U.S. dollar weakness, according to analysis from Deutsche Bank.

Treasury Boosts Buyback Program

The U.S. Treasury announced Wednesday it was raising the per-operation cap on its liquidity support buybacks, a move that caught markets off guard. According to a note from George Saravelos, Deutsche Bank's head of FX research, the key changes include:

• The maximum size of buybacks for the 10-to-20-year and 20-to-30-year nominal coupon sectors will increase from $2 billion to at least $4 billion per operation.
• The announcement prompted an immediate and "unusually sharp" weakening of the U.S. dollar, Saravelos noted.

An 'Operation Twist' Equivalent

Deutsche Bank framed the policy as a form of yield-curve management traditionally handled by the central bank. "The buyback operation is effectively very similar to the Fed's operation twist," Saravelos wrote. He explained that to finance the purchase of long-term bonds and remove duration from the market, the Treasury would need to issue more short-term Treasury bills.

This action, by design, eases financial conditions. The bank argues this puts the Treasury in the position of conducting monetary policy, which could necessitate an "offsetting tightening from the Federal Reserve" to counteract the stimulus.

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'Financial Repression' and the Dollar

Saravelos described the move as a "soft-form financial repression" policy aimed at containing the rise in long-end U.S. yields. Deutsche Bank sees this as part of a broader pattern of administrative unease with borrowing costs, fitting a framework the bank previously called its "Pennsylvania plan."

The direct implication for currency markets, according to the note, is a weaker dollar. Saravelos argued that if the market price of U.S. Treasuries is not allowed to fall freely to its market-clearing level, the adjustment for foreign investors must occur elsewhere. "The foreign exchange price of UST owned by foreign investors has to adjust via a weakening in the dollar," he wrote.

Market Outlook

The market's focus will now shift to the Federal Reserve's response. Deutsche Bank posited that if Fed Chair Kevin Warsh does not acknowledge the buyback as an easing of financial conditions, that silence would be an "additional dollar negative driver."

Going forward, investors will be increasingly attentive to further measures to support the U.S. Treasury market. "The more these are perceived as distortionary to market pricing, the more the dollar is likely to weaken," Saravelos concluded.