Nomura: If the Market Continues to Deteriorate, the Fed May Resort to 'YCC or QE'

Corporate bond issuance surged by 59%, the situation in Iran has driven up energy prices, and global fiscal expansion is under triple pressure.

Written by: Zhao Ying, Wall Street Insight

The U.S. Treasury Department suddenly announced an aggressive buyback plan, sending a clear signal to the market—long-term interest rates spiraling out of control have become an 'unacceptable' option. However, Nomura Securities strategists warn that this is just the prologue; the real policy heavy artillery has yet to make its appearance.

Nomura's cross-asset strategist Charlie McElligott stated in a recent report that this buyback announcement is essentially a 'statement of intent,' with Treasury Secretary Yellen using it to signal to the market that authorities have entered a more proactive intervention stance. Gold and Bitcoin surged in response, while the dollar fell, as the market interpreted this as a substantive shift in policy stance.

McElligott further assessed that if the market experiences a deeper deterioration, authorities may resort to Yield Curve Control (YCC) or direct Quantitative Easing (QE/LSAP) policy tools. The current triple pressure of interest rates, energy, and inflation continues to accumulate, and the risk exposure in the stock and credit markets remains highly fragile.

Buyback Announcement: Signal Value Exceeds Actual Operation

McElligott's qualitative assessment of this buyback is blunt—'a Band-Aid on a bullet hole.'

From a technical perspective, the Treasury's buyback is a fiscal operation related to debt management rather than a monetary policy tool. It essentially involves replacing old debt with newly issued bonds, maintaining neutrality in cash and deficit terms. McElligott pointed out that the specific details of the buyback are 'irrelevant and trivial'; its value lies entirely in the signaling aspect: authorities have crossed a certain red line, formally acknowledging that the rapid repricing of long-term rates has reached the boundary of policy tolerance.

It is noteworthy that the execution of this announcement was rather hasty—confusing wording, and the title even omitted the word 'buyback,' leading to widespread ridicule among market participants. Nevertheless, there was no disagreement in the market's interpretation of the underlying intent: this is a deliberate posture shift, not a technical operational error.

The initial market reaction confirmed this interpretation: long-term rates briefly fell, gold and Bitcoin strengthened simultaneously, and the dollar came under pressure. However, soon after, the worsening situation in Iran and the energy market quickly overshadowed the emotional boost from the buyback, with rates returning to a steep bearish trend, and U.S. stocks failed to hold onto overnight gains.

Multiple Pressures Accumulate, Structural Pressure on Long-Term Rates Intensifies

McElligott detailed the multiple structural forces currently suppressing long-term rates, noting that these factors are reinforcing each other in a non-linear manner.

First is the 'crowding out effect.' The surge in corporate credit supply—total investment-grade bond issuance has reached $1.7667 trillion year-to-date, a staggering 59% increase year-on-year—competes with the AI financing wave for the private sector's duration absorption capacity, putting continuous pressure on the demand side for U.S. Treasuries. Meanwhile, Japan's current policy dilemma is reshaping market expectations regarding the supply-demand dynamics of U.S. Treasuries.

Second is the fat tail risk of inflation. McElligott specifically highlighted the upward risk of 'crack spreads'—the renewed tensions in Iran and the Strait of Hormuz threaten global refined product supply. He emphasized that the Strategic Petroleum Reserve (SPR) stores crude oil, not refined products, and cannot be released directly to stabilize prices of diesel, jet fuel, and other industrial goods. This means that once supply is disrupted, price shocks will directly transmit to the real economy sectors such as transportation, agriculture, and manufacturing. European natural gas prices have risen to €65 per megawatt-hour, the highest since March 2026; Germany's 5-year government bond yield has also surpassed 3% for the first time since 2008.

Third is the chronic rise in term premiums due to global sovereign fiscal expansion, compounded by structural trends of countries pushing for supply chain reshoring and competing for critical resources under the guise of national security, further solidifying inflation's stickiness.

A 'Worse' Scenario May Involve YCC and QE

McElligott's logical chain is clear and severe: authorities are 'preheating' for liquidity pumps, but the real valve has yet to be opened.

He pointed out that the initiation of YCC or QE/LSAP requires a prerequisite—the spiral interaction between current interest rates and inflation/energy shocks must inflict sufficiently deep damage on the real economy, making it an 'inevitable' choice both politically and economically. At that point, the Fed will release substantial easing signals to the market by creating new reserves, expanding its balance sheet, and actively absorbing duration, significantly improving financial conditions and incentivizing funds to migrate to risk assets through the 'portfolio rebalancing channel.'

Before that, interest rates will continue to rise in the vacuum of the Fed's lack of clear guidance, and the energy situation does not present a 'clean exit'—unless military escalation occurs or the Trump administration makes political concessions.

For the stock market, McElligott believes that once interest rate spasms stabilize, coupled with performance catalysts from tech giants like Nvidia, the market may have a chance to emerge from a pattern of 'spot price increases and rising volatility.' However, in the short term, the sensitivity of high-yield bonds and small-cap stocks to credit spreads still poses significant downside risks, and deleveraging pressures have not yet fully released.

McElligott's conclusion is concise and powerful: the pump has begun to preheat, but the market must first get worse.