The U.S. Treasury market faces a "policy test" this week: Treasury Department's buybacks to double, taking effect Wednesday, and CPI data on Friday to determine the September rate hike suspense.

According to Zhitong Finance APP, after last week’s intense volatility in the U.S. government debt market, U.S. Treasury investors are preparing for another trading week that could trigger even larger price swings. In the first week after Labor Day, two key events will be in focus—on Wednesday, the U.S. Treasury will announce the specific details of its expanded bond buyback program launching the next day, which may be double or even more than the previous cap; on Friday, August inflation data will be released, which is regarded by Federal Reserve Chairman Kevin Walsh and his colleagues as the core basis for determining whether to raise interest rates this month.

These two events will serve as a concentrated test of the current divergence in U.S. monetary and fiscal policy— the Federal Reserve’s hawkish stance toward rate hikes is pushing up short-term yields, while the Treasury’s long-term bond buybacks are aimed at suppressing long-term borrowing costs. The market is at the intersection of these two forces, waiting to choose a direction.

Wednesday: Besant’s "Buyback Weapon" Officially Loaded

On September 9th, the U.S. Treasury will formally launch its expanded long-term Treasury bond buyback operation. On August 19th, with 30-year Treasury yields surging to the highest levels since 2007, Besant announced that the liquidity support buybacks for 10- to 30-year Treasuries would be “at least doubled,” increasing from $2 billion per operation to at least $4 billion.

More importantly, the Treasury’s wording was “at least doubled”—giving Besant greater flexibility. Tim Musial, head of fixed income at CIBC Private Wealth, pointed out that, unlike fundamentals like economic growth and inflation, the Treasury’s bond buyback plan is “hard to predict,” and advised investors to “perhaps reduce some risk exposure.”

In the tentative schedule from September 9 to November 4, the total buyback for 10- to 30-year Treasuries can reach as much as $14 billion. The single maximum amount for some operations can reach $16.5 billion. If the actual buyback volume far exceeds $4 billion, it could become a catalyst for a rally in bond prices.

However, Besant’s move has also sparked controversy in the market. His former mentor, billionaire investor Stanley Druckenmiller, publicly criticized this intervention as “liquidity support in disguise for price manipulation,” arguing that “a government that props up prices against fundamentals will ultimately fail.” But regardless, the money is ready—as market watchers have said, “The buyback funds are prepared. If you short sell, I’ll buy. You’ve been warned.”

Friday: CPI Sets the Tone for the September Rate Hike

If the buyback plan is the Treasury’s attempt to "backstop" long-term yields, then Friday’s CPI data may directly determine the direction of monetary policy.

The August nonfarm payrolls report already released a strong signal—162,000 new jobs added, nearly triple the market’s expectation of 56,000. As a result, according to the CME FedWatch tool, the market now puts the probability of a September rate hike by the Fed at about 60%.

But Walsh has made it clear that inflation data will be the key to the final decision. Wall Street is clearly divided on this: Bank of America Securities expects August core CPI to rise 0.22% month-on-month, seeing inflation as still high enough to support a September rate hike; Citi expects core CPI to rise only 0.18%, arguing that a hike may not be necessary; Morgan Stanley expects core CPI to rise 0.23% month-on-month, but sees the Fed holding rates steady. Economists generally forecast a 3.4% year-on-year CPI increase for August, with core CPI up 2.4% year-on-year.

Fed Governor Waller is seen by the market as the key swing vote for the September meeting. According to Bank of America analysis, Waller’s implied threshold for a rate hike is August core PCE rising above 0.30% month-on-month. BofA forecasts core PCE at about 0.24%, below that threshold, but still thinks enough committee members may support a hike with Walsh’s backing. Citi, however, believes Waller’s remarks raised the bar for declaring inflation “overheated,” so any month-on-month increase rounded to 0.2% may be mild enough.

CIBC’s Musial described the nonfarm payroll report as “just an appetizer”— “the main course will be served when the September 11th inflation data comes out.”

Conflicting Policy Forces

These two major events highlight the deepest contradiction in the current U.S. market: monetary policy and fiscal policy are pulling in opposite directions.

Walsh stated clearly at the Jackson Hole meeting that “the Fed’s main current focus should be on prices.” The Fed’s actions tend to push up short-term yields, using rate hikes to curb inflation.

Meanwhile, Besant’s buyback plan aims to lower long-term borrowing costs—30-year Treasury yields last week were still near 5.25%. While the Fed seeks to tighten financial conditions, the Treasury is attempting to relax long-term rates with buyback operations.

Investors will have to digest these two opposing forces this week. Short-term Treasuries may come under pressure from rising rate hike expectations, while long-term Treasuries may receive support from the buyback’s backstop effect—how the yield curve evolves depends on which force prevails.