Bessent Fights the Tide, and Loses

Last week US Treasury Secretary Scott Bessent tried to bend the 30-year (“30Y”) treasury bond market to his will. And the market promptly took his lunch money and stuffed him in a locker. I had wanted to write about this fighting the tide episode, because such overt market intervention should be anathema to supposed conservatives like Bessent. In this post I’m going to lift ideas liberally from sources that did more research than me and expressed their analysis more cogently (see here and here). This really is one of those posts where I’m writing as a form of therapy.

The Odd Lots newsletter for August 24 gets to the kernel of truth, outlining that Bessent’s purpose for the Treasury’s buybacks of 30Y bonds was to provide liquidity support to the market. Tracy Alloway then points out that this liquidity support is really about the market trading at prices Bessent doesn’t like, that is, prices are too low, leading to yields being too high.

What Bessent has done is set a floor for the US 30Y bond. If prices drop to a certain level, he will intervene in the market, and through both his direct action and the message this sends to the market, prices will stabilize and hopefully rise, reducing yields. As we saw last week, this exercise works only briefly, especially if Mr. Market has very strong convictions about the correct yield. If Bessent says “the price is x”, and the market just doesn’t believe it, then they won’t buy at x, and either the price has to drop, or the liquidity in the secondary market dries up, or worse still, they have a poor 30Y auction in the primary market, which would be a huge embarrassment.

Now that Bessent has put his stake in the ground, his credibility is tied to it, and if he can’t sustain the 30Y price, because he runs out of money (which is very unlikely), or loses the political will to make his defense, then there is the risk of a much larger move down in price (and up in yields), as the pent-up selling is unleashed. This could lead to still higher yields (6% + anyone?), which would be politically disastrous for the Trump administration.

So what is driving the spike in 30Y yields? In general, the global rates market has less belief in the “full faith and credit” of the US Treasury, and so it is demanding to be paid more for holding Treasury bonds, especially at the long end of the curve. There are also now alternatives to holding Treasury bonds, with the likes of Google, Microsoft and Amazon all regarded as just as safe, or even safer than US Treasurys. As has widely been reported, those companies plus others in the AI Industrial Complex have been issuing massive amounts of debt, to fund their AI expansion dreams. So those looking for safe havens don’t have to settle for Uncle Sam.

On the flip side, the composition of the holders of Treasury debt has changed. In the first 15 years of this century, there was a frequent recitation that China and Japan hold so much US debt that they’re pulling the strings, or could threaten the US with the mother of all rug pulls. Now, the biggest holders of US Treasury debt are US private investors, such as hedge funds. This certainly reduces the risk of Chinese rug-pulling, but I do not advise the Treasury to rely on any altruistic or patriotic tendencies on the part of hedge funds: they are holding these positions to make alpha, not just to park their surplus cash or to meet reserve requirements. If they sense that the basis trade funded by repo isn’t profitable, they are going to exit, and hopefully the door is wide enough.

The combination of these factors is a very real and very strong obstacle for Bessent to overcome. He has worked in fixed income markets for decades, yet he thinks he knows the proper price for 30Y bonds, when the market is clearly signaling otherwise.

I suspect that his boss asked “why are these rates so high? We’re going to get killed in the mid-terms, can’t you do something?” and in either an act of hubris or self-preservation Bessent said, “Yes, I can bring those rates down.” Now, Bessent has a reported net worth of over $500 million: he could have easily told Trump that the market is reacting to objective facts, and perhaps the administration should have a plan for deficit reduction. Saying these truths would at worst result in Bessent getting fired and letting him retire to his soybean farm with some shred of dignity. But he has put his chips on delusion, doubling down on buybacks, and increasing the degree of uncertainty in the market about the direction of 30Y yields. Asking investors to take on this uncertainty requires the Treasury to pay them more, in the form of higher yields, exacerbating the very problem Bessent thinks he can solve. Following this trajectory will degrade his credibility in the markets, but backtracking will get him fired. I don’t think he’ll backtrack, so we will likely see a rollercoaster ride for 30Y yields, but the overall trend will be upwards, and the longer-term result will be that the risk-free brand of US debt will no longer apply to the 30-year bond.