Economist Mohamed El-Erian said the U.S. Treasury Department’s surprise move to double its bond buybacks this week is a short-term fix that does nothing to address the root causes of soaring long-term interest rates and the federal government’s mounting debt and deficits.
It is ‘Financial Engineering’
El-Erian told CNN’s Richard Quest that the move resembles “Operation Twist,” or yield curve control, aimed at bringing down long-term rates that affect mortgages and corporate borrowing.
“If you can’t address the fundamental problem, which is too much government debt and deficits and too much borrowing by tech companies, you start financial engineering,” El-Erian said, calling it a “Band-Aid” that buys time without fixing the underlying issue.
He warned that the strategy carries real risk, pointing to Japan’s experience with more extreme yield-curve control, and called the debt numbers “stunning,” citing the $40 trillion national debt and interest payments now consuming 20% of tax revenue.
Amazon.Com, Inc. (NASDAQ:AMZN), Alphabet Inc. (NASDAQ:GOOG) (NASDAQ:GOOGL), Meta Platforms Inc. (NASDAQ:META), Oracle Corp. (NYSE:ORCL) and Microsoft Corp. (NASDAQ:MSFT) are driving a surge in AI-linked corporate debt, with issuance from the group projected to reach $250 billion this year, according to Goldman Sachs.
Treasury Steps in
On Wednesday, Treasury announced it will at least double the maximum size of its liquidity-support buybacks for long-dated bonds, from $2 billion to $4 billion per operation, effective Sept. 9 through Nov. 4, targeting bonds maturing in 10 to 30 years.
Yields fell immediately, with the 30-year dropping to 5.207% and the 10-year slipping to 4.65%, reversing Tuesday’s climb to a 19-year high.
Trump Calls Interest Rates ‘Ridiculous’ as Yields Hit Multi-Decade Highs
President Donald Trump dismissed concerns about elevated borrowing costs, telling reporters, “When our country is strong, interest rates should go down. When our country is weak, frankly, they should go up. But this country is strong.”
Economist Justin Wolfers pushed back with a chart showing the 10-year Treasury yield climbing to 4.71%, its highest level in years, up from below 1% in 2020.
Precious Metals Rally on the News
According to data shared by The Kobeissi Letter, gold and silver added a combined $1.3 trillion in market cap after the Treasury’s buyback announcement.
At the time of writing, spot gold prices were 0.47% higher at $4,496.40 an ounce, while silver prices were up 0.31% at $67.131.
Price Action: Gold, as measured by SPDR Gold Shares (NASDAQ:GLD) rose 3.84% on Wednesday to close at $413.84 and gained 3.82% further in extended trading.
Benzinga edge rankings indicate SPDR Gold Shares has a Momentum score in the 42nd percentile and a positive short-term price trend. It has a negative price trend in the medium and long term.
Disclaimer: This content was partially produced with the help of AI tools and was reviewed and published by Benzinga editors.
Photo: FOTOGRIN / Shutterstock
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