Citigroup's top macro strategist Dirk Willer told the Reuters Global Markets Forum that an assertive U.S. Treasury campaign to keep long-dated borrowing costs under 5.30% could end up reducing demand for dollar assets. Willer said that if investors search for protection against fiscal deterioration outside of centrally supported Treasuries, that behavior could create "some negative dollar impetus."
The bank adjusted its positioning after last week's Treasury intervention: Citi had been underweight Treasuries but removed that stance following the announcement that the Treasury would backstop long-duration bonds more actively. At the same time, the firm added exposure to gold and maintained a short position on the dollar, according to Willer.
Last week the U.S. Treasury expanded its support for long-term debt by doubling the size of buybacks. Still, Willer said that move did little to calm concerns about global duration risk. Those worries appear to have contributed to an increase in the Treasury term premium - the extra compensation investors demand to hold long-maturity debt rather than repeatedly rolling over shorter paper. A higher term premium tends to lift long-term yields, which feeds through to higher borrowing costs across the economy because instruments such as the 30-year Treasury serve as a reference for mortgages, corporate borrowing and other long-term financing.
Several forces cited in Willer's remarks have put upward pressure on the long end. The U.S. is running one of the largest deficits on record, government debt is expanding, inflation remains elevated, and there has been a substantial increase in long-duration bond issuance from AI hyperscalers. Those factors coincided with the 30-year Treasury yield rising to 5.327% last week - its highest level since 2007.
Willer emphasized that demand for Treasuries can be shaped by more than just direct purchases by the Treasury or the Federal Reserve. He noted a range of tools that policymakers might deploy to encourage Treasury holdings, including larger buybacks, phasing out specific maturities like the 20-year bond, or applying regulatory changes intended to nudge banks and other market participants toward holding more Treasuries.
"In proper bond crises, there are often market-microstructure issues that policymakers can address," Willer said. He framed the question as one of capacity: how many policy "bullets" remain and when they might be exhausted. He added that Citi believes authorities still have a fair number of options available, while others are more skeptical about the remaining levers.
Bond-OIS convergence and what it signals
Willer pointed to the recent behavior of the bond market relative to overnight index swaps (OIS). In the U.S., 30-year Treasury yields have moved broadly in line with matched OIS rates, leaving the bond-OIS spread relatively contained. That pattern suggests the selloff has been driven more by a repricing of underlying rates rather than by Treasury-specific credit or liquidity concerns.
"If you look at what drove the sell-off, asset-swap spreads were quite well behaved. And that’s really where fiscal problems should show up most clearly," Willer said. In other words, the selloff in long-duration government bonds appears to reflect a broader increase in long-term rate expectations instead of classic signs of sovereign stress reflected in widening asset-swap spreads.
Still, Willer warned that market positioning could change. He noted the possibility that bonds could outperform swaps closer to November, an outcome that market participants should keep in mind when considering trades and hedges.
The combination of larger deficits, elevated inflation, greater long-duration issuance by private corporates, and rising term premium has created a backdrop in which Treasury interventions may not be enough to fully alleviate duration concerns. How investors respond - whether by seeking alternative safe assets or by reallocating within fixed income - will influence dollar dynamics and borrowing costs across the economy.