Yield Curve Approaches Inversion, TGA and Fed Tools Become New Focus in US Treasury Market

On September 23, the U.S. Treasury is considering putting part of the cash from the Treasury General Account (TGA) into the private repurchase market. The current size of the TGA is close to $1 trillion, but the specific amount and frequency have yet to be determined. If the plan is implemented, Treasury cash will no longer just sit in the Fed's accounts but will be able to enter the money market directly, converting into reserves for the banking system and providing additional liquidity for Treasury trading and short-term financing. As a result, the market is paying more attention to whether the operational rules are predictable and whether the TGA sets clear trigger thresholds to avoid Treasury cash itself becoming a new source of liquidity volatility.

The importance of this discussion lies in the fact that the U.S. bond market is currently in a phase of repricing interest rates and liquidity. The spread between 2-year and 10-year U.S. Treasury yields has narrowed to about 22 basis points, prompting a renewed discussion in the market about the significance of the yield curve approaching inversion. However, unlike in the past, a flattening curve does not necessarily equate to a recession signal; more importantly, it reflects the market's reassessment of inflation, policy rates, and long-term financing needs. Meanwhile, the New York Fed emphasizes that the ample reserves framework and repurchase tools can still effectively control short-term rates, indicating that the Treasury and the Fed are maintaining market operations from different levels. Gold has also shown another noteworthy pricing change. The real yield on 10-year U.S. Treasuries has risen to 2.63%, reaching a 20-year high, but gold ETF holdings have instead risen to a 7-month high, indicating that gold's traditional sensitivity to real rates is declining. This may reflect not only central banks' continued purchases of gold but also investors beginning to interpret rising long-term yields as a sign of fiscal deficits, debt costs, and financial stability risks, rather than merely the opportunity cost of holding gold. If global liquidity improves alongside fiscal risks, the pricing logic of gold may gradually extend from "interest rate trading" to "liquidity and credit risk trading."

Therefore, what is truly worth observing now is not the price of a single asset, but whether Treasury cash, central bank reserves, and long-term rates form a new policy transmission chain. If TGA funds can systematically provide liquidity to the repurchase market, it may help alleviate pressure in the money market in the short term; however, in the long term, U.S. debt supply, fiscal financing needs, and real rates will still determine capital costs. This also explains why, even though large tech stocks in the U.S. stock market are still supported by AI investments, interest rate-sensitive sectors such as finance and utilities have already come under pressure, while gold has gradually shown resilience different from past cycles.