Market Commentary
On August 19, 2026, U.S. Treasury Secretary Scott Bessent unveiled a Treasury buyback program, dubbed the “Treasury Twist.” Under the program, Treasury would issue Treasury bills and use the proceeds to repurchase 10- to 30-year Treasuries, with the amount increased to $6 billion per operation. Market commentary has focused on the initial scale being too small to materially affect long-term yields. In our view, however, the early operations may be more important as a test of market conditions and positioning than as an end state. Given Secretary Bessent’s experience in major market interventions, a materially larger program could place significant pressure on crowded short positions in long-dated Treasuries.
The potential policy toolkit is considerably broader than the initial buyback size suggests. If heavier T-bill issuance were to strain money markets, the Federal Reserve could absorb bills through balance-sheet expansion, effectively reintroducing a form of quantitative easing. The Fed’s balance sheet previously approached $9 trillion and currently stands near $6.7 trillion, leaving substantial capacity, at least in principle, to support additional purchases. A sufficiently large combination of Treasury buybacks and Federal Reserve balance-sheet support would begin to resemble yield-curve control.
Regulatory changes could provide an additional source of demand. Lowering or eliminating certain capital requirements associated with Treasury holdings, combined with policy signalling, could encourage U.S. banks to increase exposure to long-dated Treasuries and reinforce downward pressure on long-term yields.
At the Federal Reserve’s annual symposium in Jackson Hole, Chair Kevin Warsh emphasized that price stability remains the central policy priority, with headline PCE inflation at 3.7% and core PCE at 3.3%, both above the 2% target. The speech represented a clearer inflation message than his June 17 and July 29 press conferences, when the Fed’s policy stance and reaction function were communicated less definitively.
Subsequent remarks from New York Fed President John Williams and Governor Christopher Waller were less hawkish, tempering the case for an immediate increase in the federal funds rate.
Williams argued that the recent rise in bond yields primarily reflects a resilient U.S. economy and a positive outlook supported by AI and technology investment, rather than a material increase in inflation compensation. Waller similarly emphasized the case for allowing the disinflationary trend more time to develop.
At the time of writing on September 14, 2026, markets were pricing an 80% probability of a 25-basis-point increase in the federal funds rate at the September 16 FOMC meeting. Historically, the Fed has generally sought to avoid surprising markets; however, Chair Warsh’s reduced reliance on forward guidance creates greater uncertainty around the near-term policy reaction function.
One argument for policy patience is the recent moderation in inflation momentum. From June through August, the Consumer Price Index (CPI) increased 0.31%, equivalent to approximately 1.25% on an annualized basis, well below the Fed’s 2% target.
Chair Warsh may also draw on the five task forces established to supplement conventional government data, which he has criticized as relying on outdated compilation methodologies.
The political backdrop also favours lower interest rates, adding another layer of complexity to the Fed’s policy decision.
The Bank of Canada maintained its policy rate at 2.25% at its September 2, 2026 meeting, marking a seventh consecutive hold. The Governing Council cited trade tensions, elevated energy prices and broader economic uncertainty as reasons for maintaining the current policy setting.
Renewed tensions in the Middle East pushed crude oil prices higher during August. Against this backdrop, the yield on the Government of Canada long bond increased from 4.00% to 4.14%, while the 2-year yield rose from 2.86% to 3.00%.
The slope of the Canadian yield curve was broadly unchanged in August, with the 2s30s spread ending the month at 1.14%. By September 14, however, the spread had narrowed to 0.90%, representing 0.24% of flattening. In our view, further flattening remains likely as the Canadian economy weakens.
During August, the Canadian long bond underperformed its U.S. counterpart by 0.13%, with the yield spread narrowing from -1.21% to -1.08%. Despite this monthly relative underperformance, the Fund continues to favour the Canadian long bond within the domestic curve. We expect weakening Canadian growth to reassert its relative advantage over time.
During August, the U.S. dollar weakened from 1.4017 to 1.3850 versus the Canadian dollar. Given previously severe overbought conditions in USD/CAD, the Fund remained on the sidelines and avoided the downside associated with the currency reversal. USD/CAD was last near 1.3898.
Fund Performance and Positioning
The Fund remains positioned for a weaker Canadian economic backdrop through exposure to 30-year Government of Canada bonds. These holdings are actively traded to improve the portfolio’s average entry cost. Effective Duration for the Fund was 7.2 years as at the end of August.
USD/CAD declined from 1.4017 to 1.3850 in August as previously severe overbought conditions continued to correct. The Fund will seek opportunities to re-establish a long U.S. dollar position when valuation and technical conditions become more favourable. Over the month of August, the Fund declined -0.5%, trailing its benchmark, the S&P Canada Sovereign TR Bond Index by 0.4%.
Outlook
Renewed trade tensions add further downside risk to the Canadian growth outlook. As economic conditions soften, we expect the Bank of Canada to begin reducing policy rates, supporting continued yield-curve flattening. Declining long-term yields would create capital appreciation potential for the Fund’s 30-year Government of Canada bond exposure and reinforce the current portfolio positioning.
Chart of the Month
UThe prevailing market narrative is that large U.S. fiscal deficits and higher energy costs are placing upward pressure on long-term interest rates. In our view, a sufficiently scaled Treasury buyback program - particularly if reinforced by Federal Reserve balance-sheet support or regulatory changes - could help contain the upside in long-term yields. At the same time, higher energy costs reflect a supply shock rather than excessive demand, which should weigh on real economic activity as households and businesses adjust.
The chart below, from Apollo Chief Economist Torsten Slok, presents an additional perspective: if AI succeeds, productivity gains and disinflationary forces could drive long-term rates lower; if AI disappoints, weaker risk assets and a flight to Treasuries could lead to the same directional outcome.
If AI succeeds, rates will be lower. If AI fails, rates will be lower.
Source: Apollo