Overview
Citrini Research, founded by James Van Geelen, says the U.S. Treasury Department and the Federal Reserve are moving toward a coordinated policy approach that would shift government borrowing toward shorter‑term debt and cut the supply of longer‑dated Treasuries. The firm labels this convergence of banking regulation, Treasury debt management and Fed balance‑sheet policy a new “Treasury‑Fed Accord.”
Mechanism of the Accord
Under the proposed framework, the Federal Reserve would reduce its balance‑sheet holdings while commercial banks expand theirs, taking on more Treasury bills as the Treasury moves issuance away from longer maturities. The resulting lower supply of long‑dated securities is expected to push down long‑term yields, potentially sparking a rally in 30‑year bonds.
Investment Recommendation
Citrini recommends that clients position for 30‑year bonds to outperform five‑year notes, a trade that would profit if the yield gap between the two maturities narrows.
Treasury Twist Initiative
Treasury Secretary Scott Bessent recently announced plans to increase buybacks of long‑term bonds, a strategy he calls a “Treasury twist.” The twist would replace some longer‑dated debt with Treasury bills, easing pressure on the market after 30‑year yields reached their highest level in almost two decades.
Alignment of Authorities
Citrini writes, “We expect that monetary and fiscal authorities – Fed Chair Kevin Warsh and Treasury Secretary Scott Bessent – are aligned on a framework.” The framework aims to reduce the Fed’s presence in financial markets, improve fiscal sustainability and support growth by allowing banks to lend and invest more.
Upcoming Events and Timeline
Fed Chair Kevin Warsh, who supports a smaller Fed balance sheet and has created a task force to review its size and maturity composition, will speak at the annual Jackson Hole symposium on Friday. Citrini expects the gap between five‑year and 30‑year yields to narrow over the next three months, becoming evident at the Treasury’s next refunding announcement on November 4, when the “Treasury twist” should become apparent to the market.
Longer‑Term Outlook
Beyond the next few months, Citrini remains bearish on long‑term bonds. The firm argues that Bessent’s strategy of keeping nominal economic growth above the government’s borrowing cost would leave bondholders with returns below inflation. Moreover, lower yields could encourage additional borrowing and add to inflation pressures.
Conclusion
Citrini Research anticipates a short‑term rally in 30‑year Treasury bonds driven by coordinated Treasury‑Fed actions and a reduced supply of long‑dated debt, but it maintains a longer‑term bearish stance on those securities due to concerns about real returns and inflationary effects.