Treasury Secretary Scott Bessent insisted Thursday that he has multiple weapons at his disposal to quell liquidity problems in the government debt market and restore calm.
While that's true in itself, a two-pronged effort he has deployed so far — accelerated buybacks and an effort to talk the market into accepting the rationale — has met with little success.
The Treasury announcement Wednesday that it would at least double its bond buybacks starting in early September sent yields tumbling as investors applauded a backstop for longer-maturity government bonds.
However, yields at the long end quickly rose again Thursday as market experts showed skepticism at whether the push would succeed against a bevy of factors working against Treasurys.
Then on Thursday, Bessent appeared on CNBC with assurances that the intervention was merely aimed at providing market liquidity and not at trying to control the yield curve. While yields initially nudged lower, they quickly rebounded amid criticism of how the prior day's announcement was rolled out, leading one analyst to characterize the appearance as having "minimal impact" on the market pressures.
Still, that leaves Bessent with a variety of options that he may yet choose to deploy.
"We have a big toolkit," the Treasury chief said. "Part of it is signaling here and to show that we believe that the yields don't reflect the underlying fundamentals."
Yet markets are still worried, and criticism rose that the size of the buybacks, which Bessent confirmed could exceed $4 billion, would be rendered ineffective in such a large market.
Evercore ISI analyst Krishna Guha called the plan "a weak form of Operation Twist," or a Federal Reserve initiative that swaps longer-term notes and bonds for short-term bills. The move "in itself will have little enduring impact and could backfire if it is seen as signaling concern about the ability to fund longer-term at acceptable cost," he said. The interview "had minimal impact on the bond market," he added.
That leaves Bessent with a handful of other options, none guaranteed to work and each carrying its own risk:
- Bigger and more frequent buybacks: Bessent simply could say the initial round of stepped-up buybacks went so well that Treasury is going larger.
- Smaller auctions: The department simply could cut down on the level of longer-dated debt it is issuing and shift it into shorter-term bills, an approach Bessent criticized strongly when it was employed by his predecessor, Janet Yellen.
- Changing the maturity composition of outstanding debt: This essentially would be a larger-scale version of smaller auctions and would require market participants to snap up shorter-duration — and lower-yielding — debt, a risky proposition. "Global investors know that struggling sovereigns often resort to shorter dated issuance. We think the US is different from all others, but it is not different without limit," Guha, who is Evercore's head of economics and central bank strategy, said in a client note.
- Invoking the 'Bessent put': Markets already are using the term to describe the Treasury moves, and the secretary can use his tools in an unpredictable manner to keep anyone betting against U.S. debt off guard. "We think this is much more suited to the type of tactical guerilla operation to catch shorts off-guard, impose losses and create a perception of two-sided risk that may slow down a fundamentals-driven move in yields and prevent overshooting — the smoothing version," Guha wrote. "The problem is that this may not have much lasting impact on where yields are a few months from now."
Credibility at stake
Whichever route he chooses — and he could also choose to do nothing and let the markets sort it out — Bessent could face credibility challenges from a market already growing skeptical and leery of the challenges Treasurys are facing.
Jefferies' chief U.S. economist, Thomas Simons, complained that the buyback announcement itself was improper. He pointed out that the move came two weeks after Treasury announced its quarterly refunding plans, during which it gave no indication that it was considering changing the buyback scheme.
"This breaks with Treasury's long-held strategy of making 'regular and predictable' announcements, and using the Refunding to announce almost all of their policy changes and guidance," Simons wrote. "We do not think it is hyperbole to say that this break in communication strategy reduces the overall credibility of their guidance."
Moreover, Simons added that "the sloppy wording of [the] headline on [the] release gave the impression that this was a hastily made decision."
The challenge, then, for Bessent could be that efforts to suppress longer-end yields could give investors another reason to demand more compensation.
Factors at play
Along the lines of what Bessent told CNBC on Thursday, not all of the factors at play are fundamental. They include rising competition from corporate bond issuance as well as suddenly attractive yields of other sovereigns including Japan; a correlation with oil prices that in turn increases inflation fears; and increasing term premiums, or the extra yield investors are demanding.
To combat those problems, Bessent could seek cooperation with the Federal Reserve. Though Fed Chairman Kevin Warsh has stressed the importance of letting the market set rates, Bessent suggested Thursday that the two entities "would work together" in dealing with complications in the bond markets and as the central bank manages its own Treasury holdings.
The various moving parts come during a paradigm shift in the government debt markets, both in the U.S. and globally.
"There has also been a structural shift in who buys U.S. government debt," said Atsi Sheth, chief credit officer at Moody's Ratings. "As central banks shrink their balance sheets and traditional duration buyers reach the limits of how much additional issuance they can absorb, new buyers, such as leveraged hedge funds running relative-value strategies, are playing a bigger role."
On top of all that, the U.S. faces a daunting fiscal situation in the form of a deficit-to-GDP ratio of nearly 6%, or about triple its average from the end of World War II until the Covid pandemic. That is compounding a problem with the national debt, which just surpassed $40 trillion.
With President Donald Trump hungry for tax cuts and Congress showing few signs of spending restraint, the fiscal problems are likely to mount. To that end, Bessent said he and Russell Vought, head of the Office of Management and Budget, will meet soon to discuss "fiscal consolidation," generally understood to refer to efforts to reduce red ink.
"It's that combination of the deficits, the borrowing needs, inflation expectations, not really knowing what future Fed policy is going to be, and the sustainability of being able to issue higher, ever higher, levels of U.S. Treasury debt, and what rates those need to be at," said JoAnne Bianco, senior investment strategist at BondBloxx. "There's just the idea that there needs to be a higher risk premium for all the issuance."