What is Scott Bessent doing with the $32tn Treasury market — and will it work?
US Treasury secretary has made a high-stakes bet he can beat back soaring borrowing costs
Claire Jones in Washington
US Treasury secretary Scott Bessent has been a valuable asset for Donald Trump, calming market jitters triggered by the US president’s policies.
Now the former financier is facing his sternest test, taking on investors in the $32tn US Treasury market who are spooked that Trump’s Iran war is pushing government spending and inflation higher.
The recent sell-off in long-term US debt did not “reflect the underlying economic fundamentals”, Bessent told CNBC on Thursday.
He blamed “very poor” liquidity for the turmoil.
As oil prices rise and the Iran war shows few signs of ending, here is what the Treasury secretary is doing to keep a bond market revolt at bay.
What is Bessent’s big gamble?
His main goal is halting a sell-off in long-term debt, such as 10-year and 30-year Treasury bonds, that has pushed US government borrowing costs to multiyear highs.
Yields rise when bond prices fall, and the move has sparked a broader increase in interest rates on everything from corporate debt to mortgages — just months ahead of November’s midterm elections.
On Wednesday, the Treasury rushed out an announcement that it would “at least” double the department’s purchases of longer-dated government bonds from $2bn to at least $4bn.
Those purchases — known as buybacks — have in the past been used to iron out minor issues in the plumbing of the Treasury market, not as a macroeconomic tool to control yields.
The pumped-up scheduled purchases will begin in early September and end in early November.
Bessent also hinted at more intervention if the $4bn fell short, saying the US Treasury had a “big toolkit” and “asymmetric information” at its disposal.
How will the Treasury pay for this?
The US Treasury’s toolkit, unlike the Federal Reserve’s, does not offer Bessent potentially unlimited powers to create cash.
Unlike the Fed, the Treasury cannot engage in a multitrillion-dollar bond-buying spree — dubbed by central bankers as “quantitative easing” — to bend the yield curve and keep the government’s borrowing costs low.
The Treasury is yet to announce how it plans to fund the purchases.
But its only real way to pay for its long-term debt purchases is to raise money by selling shorter-term debt.
In line with that, market participants bet soon after Wednesday morning’s announcement that the Treasury would issue more short-term debt.
That, in turn, flattened the yield curve by raising the cost of borrowing on three-month and six-month notes.
The likely strategy of buying long and issuing short has drawn comparisons with the Fed’s Operation Twist in 2011, where the central bank used the proceeds of sales of hundreds of billions of dollars’ worth of short-term notes to buy longer-dated government bonds.
The Fed’s operation helped lower longer-term borrowing costs at a time when short-term interest rates were already close to zero — but was far larger than Bessent’s intervention.
Will the plan work?
While yields on the 30-year bond edged down on Wednesday’s announcement, by Thursday afternoon most of that improvement had evaporated.
Yields on the benchmark 10-year bond, which dictate the price of longer-term loans across the US economy, had reversed.
Market participants said several factors — ranging from the US’s huge fiscal deficit to competition for capital from AI groups, and the economic repercussions of the Iran war — were driving US government borrowing costs.
“Bond buying can target pinch points, but doesn’t change the debt trajectory,” said Dec Mullarkey, head of investment strategy and asset allocation at SLC Management.
“Debt markets are repricing for the growing fiscal risks.”
Some also think the optics of Bessent directly intervening in the Treasury market to influence borrowing costs could itself prompt a further debt sell-off, raising yields further.
“Some investors may be thinking that if the administration is resorting to yield curve control, maybe the administration feels like inflation is going to be higher for longer,” said Michael Strain, director of economic policy studies at the American Enterprise Institute.
“And that’s going to put upward pressure on longer-term yields.”
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