Basent intervened to save the bond market, resulting in the salvation of gold and Bitcoin — now, everyone is waiting for Waller.

Last week, U.S. Treasury Secretary Basent announced that he would at least double the size of long-term U.S. Treasury bond buybacks, attempting to suppress the continuously rising long-end yields. The effect was immediate but lasted less than a day — yields subsequently returned to high levels and remained stable for the week.

In a post-announcement interview, Basent said the market "overreacted a bit", and emphasized that the Treasury has a "powerful toolbox". But the market responded differently through actions: the dollar fell nearly 1% that week, gold surpassed $4,600, and Bitcoin rose more than 25% in a week.

This combination was termed a "pressure release valve" by Charlie McElligott of Nomura Securities — as authorities tried to stabilize long-end rates, market anxiety redirected itself elsewhere.

This week's focus: Can Waller provide answers?

The baton has now passed to Federal Reserve Chairman Waller. He is scheduled to speak at the Jackson Hole Economic Policy Symposium this Friday.

Since taking office in May this year, Waller has provided almost no forward guidance. His last comments after an FOMC meeting directly triggered a massive sell-off in the bond market — the market is extremely sensitive to what he says and how he says it.

According to Bloomberg, traders most want to know: In the face of stubborn inflation above the 2% target and a worsening fiscal situation, what exactly is the Federal Reserve's policy response function?

Molly Brooks, U.S. interest rate strategist at TD Securities, warned: "If it’s the same old story, I think the market will feel disappointed, which could exacerbate the long-end sell-off we’ve already seen."

Dhiraj Narula, an interest rate strategist at HSBC, believes, "Waller has an opportunity to soothe the market: If Chairman Waller can characterize potential inflation pressures, it would provide some basis for lowering the uncertainty-related term premium."

Bloomberg Markets Live strategist Michael Ball stated: Basent can adjust the debt maturity structure, but only the Federal Reserve can anchor inflation expectations. Waller's Jackson Hole speech must reiterate that the 2% target is still achievable and clearly state that policy actions will be taken if inflation persists, even if it means friction with the administration.

Why Basent's actions are not enough?

Peter Tchir of Academy Securities pointed out that the U.S. government currently has $7.5 trillion in short-term Treasury bills (T-bills) and $21.7 trillion in coupon bonds circulating in the market. Basent's buyback operations are "at least $4 billion" each time, occurring almost weekly — increasing from $2 billion to $4 billion each time sounds significant but has not truly shaken the market.

Tchir judges that this is not QE (quantitative easing). Basent's actions are merely "rearranging the chairs on the deck" and do not actually create money. The market's reaction, with gold rising and the dollar falling, reflects a more excessive interpretation of the "currency devaluation" narrative rather than the Treasury genuinely expanding the money supply.

There is also a little-known but extremely critical data point: the Federal Reserve currently holds over 50% of all 10 to 15-year maturity U.S. Treasury bonds. This is quite far from a "free market." Meanwhile, the proportion of long-term bonds held by the Federal Reserve is also close to 20%.

Interestingly, the Federal Reserve also holds nearly $426 billion in coupon bonds maturing within a year, with an average coupon rate of only 2.9%, while the current effective federal funds rate is 3.63% — the Federal Reserve is continuously losing on this position.

"Twist operations": Can the Fed save what Basent cannot?

This backdrop has led the market to discuss a long-quiet tool: the Fed's version of "Operation Twist."

The logic is not complicated: If the Federal Reserve sells those $426 billion in short-term bonds and buys the same nominal amount of long-term bonds with maturities of 20 years or more, it would create a temporary accounting loss but could gain considerable interest spread (approximately 5.25% holding yield compared to a 3.63% funding cost). More importantly, this would absorb over 15% of the circulating long-term bonds, effectively lowering long-end yields.

From Waller's perspective, "Operation Twist" does not count as QE because it does not change the total nominal amount of bonds held by the Fed. This is more politically acceptable. Tchir's judgment is that if the White House truly wants long-end yields to decline, it must abandon "minor interventions" within Basent's control and push the Fed to fully engage in Operation Twist.

Bloomberg analyst Ball holds a similar judgment: Basent's plan is increasingly resembling a "lightweight version of Operation Twist" — the Treasury exits long-term debt through buybacks, shifting toward short bills and short notes; the Fed buys short bills through reserve management, absorbing front-end supply without expanding its balance sheet. However, this set of tactics has its inherent contradictions: the higher the share of short-term financing, the greater the Treasury's exposure to policy rates. Once inflation forces the Fed to raise rates, interest costs will reset at an even faster pace; and if the Fed hesitates due to concerns over fiscal costs, the market will punish its independence with a higher term premium.

Thus, either the Fed must step in to support Basent, or this intervention will fail — and a failed intervention often causes more harm than no intervention.

Data window: Wednesday's PCE as a precursor

Before Waller's speech at Jackson Hole, the market will encounter an important data point — the personal consumption expenditures (PCE) index for July, to be released on Wednesday.

According to Bloomberg, in the past month, inflation, employment, and retail sales data have all been within or below expectations, leading traders to lower their recent rate hike expectations. If PCE data continues this trend, it could provide some buffer for Waller's speech.

However, the time window is narrowing. Bloomberg analysis points out that the political pressure of the mid-term elections, along with the U.S. Bureau of Economic Analysis updating the PCE statistical methodology at the end of September, could make the tightening operations after the September FOMC meeting increasingly complex in political perception.

5% is key, doubts about whether devaluation trade can persist

Wall Street Insights wrote, Bank of America strategist Michael Hartnett views a 5% yield on 30-year U.S. Treasuries as an important dividing line, believing that if it cannot fall below this threshold, it will exacerbate the pressures faced by the dollar and highly leveraged sectors — including large-scale AI computing companies and private credit.

Bridgewater founder Ray Dalio issued a warning last Friday, advising investors to reduce bond exposure and hold gold and some Bitcoin to hedge against a potential U.S. debt crisis.

This pressure is not unfounded. Bloomberg points out that as the conflict with Iran continues to escalate, the fiscal outlook is increasingly on the market's radar; at the same time, the surge in bond issuance by AI-related companies is competing for the same pool of capital as U.S. Treasuries; foreign investors' demand for U.S. Treasuries is becoming more "price-sensitive," and their tolerance for the current policy direction is also declining.