World Gold Council In-depth Analysis: U.S. Treasury Repo, the Market May Not Buy It

Faced with the continued climb of long-term bond yields, the US Treasury announced it would increase the scale of long-term government bond “buybacks” to curb the rise. Yields fell in response, the dollar dropped in tandem, and gold rose by 3% (Figure 1). As Mohamed El-Erian stated after the release, while this move is not yield curve control (YCC), it may represent a step in that direction. Here’s our interpretation.

Figure 1: Yield, the dollar, and gold’s reaction to the US Treasury buyback announcement

*Data reflects the intraday response post-announcement of US Treasury buybacks on August 19, 2026.

Who Will Buy US Treasuries

While US Treasury yields ultimately reflect the market’s expectations for economic growth, inflation, and monetary policy, investors are increasingly focused on a key question—can the ever-growing supply of government debt be balanced with the absorption capacity and willingness of the various buyer groups?

On the supply side, issuance volume continues to surge: ongoing fiscal deficits require an ever-larger scale of borrowing, and the continually expanding outstanding debt also needs refinancing.

On the demand side, some traditional buyers appear more cautious. Foreign official institutions are accelerating diversification of their reserve assets and dispersing dollar risk exposure, while overseas private investors are finding more attractive returns in other markets.

Banks are still subject to balance sheet constraints, and corporate borrowing related to AI and data center investment is also diverting investor funds (Figure 2). In addition, within demand for US Treasuries, the share held by private sector investors such as hedge funds, who are highly price-sensitive, continues to rise.

Figure 2: US Treasury issuance is soaring, while AI-related bonds are also competing for capital

*AI-related bond issuance data is sourced from the Dallas Fed report “How AI Debt Financing Affects Duration Supply and Rates” (translator’s translation). US Treasury issuance data comes from the Securities Industry and Financial Markets Association (SIFMA).

Against this backdrop, with current high inflation, and concerns about public debt trajectories and the independence of policymakers, investors demand higher risk premia for holding long-term US Treasuries. The recent rise in yields suggests investors no longer assume that treasury supply can be easily absorbed by the market, and the balance of supply and demand has become an increasingly important factor in pricing.

Policymakers’ Limited Options

The US Treasury’s increased buybacks indicate that officials are willing to intervene moderately, but stop short of direct measures such as quantitative easing.

There are some relatively mild alternatives, such as adjusting the Enhanced Supplementary Leverage Ratio (eSLR), curbing treasury sell-offs (similar to what was done during the yen intervention in early August), or promoting the development of stablecoins. But these measures likely only address symptoms rather than root causes.

The likelihood of the Federal Reserve resorting to another round of quantitative easing is low, given the high credibility costs involved. In principle, raising rates can achieve similar goals by dampening inflation expectations and compressing term premiums—why turn to unconventional balance sheet tools to manage longer-term yields, especially when the Fed Chair has openly opposed such moves? However, on the eve of the midterm elections, further rate hikes may not be palatable for all stakeholders. Another possible alternative could be yield curve control, with the Federal Reserve, rather than the Treasury, directly intervening to suppress yields.

Why Yield Curve Control May Quietly Enter Policy Debates

Yield curve control may be more than just an academic concept. In 2020, as a response to COVID-19, the Federal Reserve discussed such a measure. Going further back, the US adopted YCC in the 1940s with initial success. Japan and Australia have implemented yield curve control in the past decade. For both these countries, the goal was to prevent yields from falling below target levels, while tweaking the shape of the curve. In the current US context, the aim of YCC would mirror the 1940s—namely, to cap the upside in yields.

Unlike quantitative easing, yield curve control doesn’t necessarily require the Fed to expand its balance sheet substantially. Quantitative easing is about the scale of asset purchases and leads to significant expansion of the balance sheet—a key pillar for gold’s investment case after the global financial crisis. In theory, YCC can be deployed on a temporary basis and with much less impact on the balance sheet.

It can even be framed as a measure to improve market functioning rather than a macroeconomic stimulus, so even if its form and effect are similar to QE, it may not be defined as such. This can be seen as a kind of plausible policy deniability on the monetary side.

What Might This Mean for Gold

As with all factors, the impact of YCC on gold is not one-way. US monetary policy is just one of many global drivers of gold prices, and for Western investors, YCC won’t automatically translate into a gold tailwind. However, we believe the likely positive effects outweigh the negatives, and could spark major market attention for gold:

· Pressure on the dollar. Weakness in the dollar is probably the most direct channel by which YCC benefits gold. This was already evident around the time of the August 19 buyback announcement. In our view, with the dollar looking richly valued and already under pressure on several fronts, yield curve control—like the buyback plan—will increasingly force the adjustment through the FX market rather than bond markets.

· Financial repression, or the policy act of suppressing yields, sets up a tug-of-war between policymakers and markets. Markets can clear US Treasuries at administratively influenced prices, but this breeds uncertainty as investors can’t easily know where yields would stabilize absent policy support. As seen in other episodes of market intervention—especially Japan’s experience—markets are not easily cowed. This need not involve aggressive short-sellers or even actual selling, just the absence of buyers. What attracts capital to gold might not be just low yields themselves, but the underlying policy intervention that artificially pushes them down.

· Real yields decline. Yield curve control could make it harder for nominal yields to keep pace with rising inflation expectations. If officials successfully cap yields while inflation runs hot, real returns on government bonds will fall. Gold’s negative correlation with real rates may be further reinforced as a result.

That said, if investors believe the policy is credible and temporary, yield curve control may work. It can alleviate concerns about a breakdown in market functioning, and may compress term premiums and lift market sentiment. Oddly, even if bond yields decline, gold could weaken. Yet the US experience of the 1940s shows such arrangements are hard to sustain for long. Back then, YCC ultimately broke down as inflation surged and fears about Federal Reserve independence grew. Does this sound familiar?

Unfortunately, we can’t run a counterfactual on gold’s performance then, since gold was not freely tradable like silver, copper, or other hard metals at the time. Gold mining stocks are also not a perfect proxy: they might reflect some of the monetary demand for gold, but rising costs also squeezed company profit margins.

However, recent years’ experience suggests worries about high debt remain a key pillar for gold demand in the US and elsewhere, and any measure that doesn’t involve actual debt reduction or deficit narrowing is likely to remain supportive for gold.

Editor: Zhu Henan