Can the Bank of Japan's "twist operation" really suppress long-term interest rates? Goldman Sachs: Fiscal issues are the real root cause, and term premium may persist for a long time.

The battle over controlling long-term U.S. Treasury yields is turning into a tug-of-war between fiscal realities and policy tools.

Recently, U.S. Treasury Secretary Janet Yellen announced a doubling in the size of buybacks for Treasuries with maturities beyond 10 years, attempting to send a signal to the market and curb any further rise in long-term yields by increasing long-term Treasury repurchases. After the announcement, the 30-year Treasury yield fell about 10 basis points on the day, with the curve showing a bull-flattening move.

However, the macro team at Goldman Sachs remains cautious, noting that this intervention merely provides temporary relief and does not change the directional trend of long-term yields.

Goldman Sachs macro strategist Vitali Meschoulam commented bluntly: "Twist operations can affect term premium, but can't remove it. Such operations may alter the path, but rarely change the destination."

The current drivers of higher long-term yields have shifted from technical factors to fiscal fundamentals, and once the market starts to price in sovereign funding dynamics, the ability to cap yields becomes increasingly limited. This operation may bring a brief compression of 20 to 40 basis points and a temporary curve flattening, but it cannot reverse the broader trend.

As of Thursday's deadline, the U.S. 10-year Treasury yield rose 3 basis points to 4.684%, essentially returning to where it was before Yellen's announcement to expand the buyback plan on Wednesday.

Yellen sends a signal, market cools off briefly

In absolute terms, the volume of this buyback expansion is minuscule and could technically have easily fit into the last Treasury Borrowing Advisory Committee (TBAC) refunding announcement—it does not constitute a substantive shift in policy mechanism.

Yellen’s real intention is to send a psychological signal to the market: there is policy willingness to intervene in increasingly crowded steepener positions, introducing two-way risk for what has been considered a one-way bet on long-end rates.

The market's immediate response proved this view—a roughly 10-basis-point drop in the 30-year yield, but the price move mostly reflected positioning, not a fundamental shift.

Pressure can be diverted, but not eliminated. Short-end rates remain anchored by the Fed, but once the long-end faces intervention, the pressure shifts to the dollar. Dollar depreciation became the most obvious market spillover after the announcement.

The Treasury’s intervention, to some extent, was driven by the fact that recent Fed communications have not effectively prevented further tightening of long-end financial conditions. The friction between the Treasury's intent to manage long-end yields and the Fed's balance sheet reduction process will be a key variable to watch heading into the Jackson Hole meeting.

Historical precedents: Policy works best when in sync with market direction

The common prerequisite for policy intervention effectiveness is a prevailing market consensus for yields to move downward.

In 1961, the original U.S. "Operation Twist" and the 2011 Fed maturity extension program both succeeded in slightly lowering long-end yields, with effects estimated at 10 to 20 basis points. However, at the time, inflation was mild and economic growth was weak—the market was already inclined toward lower rates, so policy was simply going with the flow.

Japan’s Yield Curve Control (YCC) is the most successful case of long-end yield suppression, but its conditions were highly stringent: long-term absence of inflation, abundant domestic savings, and wide investor acceptance of the policy-set equilibrium yield level. If inflation returns, the cost of maintaining caps rises sharply and becomes unsustainable.

Australia’s experience is more straightforward: yield target operations worked until the market judged that inflation and growth had fundamentally changed, forcing the central bank into the dilemma of "unlimited bond buying or abandoning the target," with abandonment as the ultimate choice.

Emerging markets’ experiences also confirm this rule. Turkey, through regulatory measures and forcibly boosting domestic demand, temporarily compressed yields, but investors ultimately focus on inflation, FX stability, and policy credibility, meaning risk premia inevitably re-emerge.

Brazil has temporarily stabilized the long-end with liquidity moves, but ultimately the curve always returns to pricing based on fiscal credibility, inflation expectations, and real interest rates.

From this, one can infer that investors can usually tolerate one of weak growth, high inflation, or deteriorating fiscal balances, but not all three at once.

The current predicament: Triple pressure makes technical tools ineffective at the root

This round of rising long-end yields is not due to technical imbalances but is jointly driven by three structural factors: persistent fiscal deficit expansion increasing duration supply, lingering inflation uncertainty, and market anxiety over structurally higher equilibrium real rates compared to the post-financial crisis era.

Compared to 2011, the recent rise in long-term yields goes far beyond market reassessment of the Fed’s policy path. Increasingly, adjustments are happening through higher term premia—something that's fundamentally more difficult for policy tools to compress.

In addition, there is a commonly overlooked factor: the enormous capital needs driven by artificial intelligence infrastructure—massive data center capex, power infrastructure investment, and the broader trend toward reindustrialization—are making capital itself scarcer and more expensive.

Treasury buybacks and issuance structure adjustments are insensitive to these three forces—they can affect the volume of duration the market needs to absorb, but cannot fundamentally change inflation expectations, the fiscal trajectory, or the equilibrium real rate. This is precisely the difference between "technical mitigation" and "structural solution."

Goldman Sachs therefore concludes: until there is a clear deterioration in growth, a decisive decline in inflation, or a genuine improvement in fiscal conditions, investors will continue to demand compensation to hold duration assets. Yellen’s latest move is best understood as managing the market’s perception of duration risk, not removing its underlying cause.