Scott Bessent takes on bond vigilantes in $32tn Treasury market
Wall Street investors say move to buy more long-term US debt is a ‘band-aid on a bullet hole’
George Steer and Harriet Clarfelt in New York
Scott Bessent’s buyback strategy is the latest example of how he has taken a far more unconventional approach than many previous Treasury secretaries © Kevin Lamarque/ReutersTreasury secretary Scott Bessent’s bid to prop up the US bond market has been dismissed by investors as a “band-aid on a bullet hole”, as concerns mount over Washington’s $40tn debt burden and smouldering inflation.
The US Treasury department on Wednesday stunned Wall Street by revealing plans to “at least double” its purchases of long-term government bonds beginning next month.
Long-dated Treasuries soared after the announcement, pulling 30-year borrowing costs away from the 19-year high they reached days earlier.
But the rally quickly fizzled, with yields once again rising higher even after Bessent on Thursday took to CNBC television to tout the “big toolkit” at his disposal to tame the world’s most important market.
“[Bessent] understands the problem. But understanding the problem and being able to do something material about it are two different things,” said Jim Caron, chief investment officer at Morgan Stanley Investment Management.
“The Treasury simply can’t control long-term yields.”
Bessent’s buyback strategy is the latest example of how the former hedge fund manager has taken a far more unconventional approach than many previous Treasury bosses.
He has, in recent weeks, launched a rare move to boost the Japanese yen by selling euros and has repeatedly moved oil prices by signalling imminent progress in negotiations with Iran.
His attempt to cast himself as America’s “top bond salesman” has pitted him against bond vigilantes in the $32tn market — investors who have taken fright at America’s deteriorating public finances, persistently high inflation and the borrowing binge by Big Tech to finance the AI boom.
Charlie McElligott at Nomura said Bessent’s Treasury buyback plan “by itself” amounted to a “band-aid on a bullet hole” and would “not be enough to placate market forces”.
The Treasury said on Wednesday that beginning on September 9 it would increase its regular purchases of Treasuries maturing between 10 and 30 years from $2bn to $4bn or more.
It marked a big expansion of a scheme that was initially designed to help facilitate trading in older Treasuries.
Some analysts said the abrupt nature of the move, which came two weeks after the quarterly refunding announcement when the Treasury normally unveils its borrowing strategy, had dented the agency’s credibility.
“We do not think it is hyperbole to say that this break in communication strategy reduces the overall credibility of their guidance,” said Thomas Simons, chief US economist at Jefferies.
Although Bessent did not spell it out, most investors expect the Treasury to balance higher buybacks of long-term securities by issuing more short-term debt — a move that leaves the department exposed to fluctuations in interest rates.
It has not gone unnoticed that Bessent in 2024 criticised then Treasury secretary Janet Yellen for pursuing a similar policy.
“The question is will Bessent continue to go down the path he criticised,” said Mike O’Rourke at Jones Trading, who expects that the Treasury secretary will be forced to be “bigger and more aggressive” if he plans to continue “papering over the problems”.
Bessent argued on Thursday that “yields don’t reflect the underlying fundamentals”, citing the effects of the Iran war and “very poor” liquidity in the 30-year Treasury market.
He said Washington would announce at the end of this week or early next week “an increased focus on fiscal consolidation”, while adding that there is a “very good chance” the US has reached the peak of its government deficits.
The non-partisan Congressional Budget Office projects the US budget deficit will register 5.8 per cent this year — steady compared with 2025 and well above Bessent’s long-stated goal of reaching 3 per cent by 2028.
Sarah Bianchi at Evercore said that “while Bessent’s comments signal a focus on fundamental drivers of high borrowing costs, we are sceptical the administration can realistically do anything at this point on the deficit that would be material”.
“The surprise buybacks announcement this week has had only a fleeting effect, and we think any deficit-related announcement would be at least as limited,” she said.
Scott DiMaggio, head of fixed income at AllianceBernstein, said that for the buyback to have a more lasting effect, “you need the [Federal Reserve] to do something.
And then you have to do something on the deficit side and the debt management side too.”
Others stressed that Bessent’s higher buyback plan was designed to demonstrate the Treasury’s concern and slow the rise in bond yields rather than reverse the move higher altogether.
Robert Tipp, head of global bonds at PGIM, argued the US bond market sell-off would have been more pronounced without Bessent’s intervention.
“It’s a finger in the dike, but you’re in a world of rising interest rates, fiscal profligacy and above-target inflation, and frankly the US has been an outperformer” compared with other countries’ bond markets, Tipp said.
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