Treasury Secretary Scott Bessent’s intervention in the bond market has caused yields to fall slightly, with growing derision from those who believe it won’t work in the long run and could have dangerous consequences.
Wall Street is generally skeptical about whether the Treasury has enough firepower to manage a bond market that will record about $4.7 trillion in bond issuance in 2025 alone, a level that could surpass this year.
Mr. Bessent proposed at least doubling the department’s repurchase efforts on long-term debt issues. The Treasury also intervened in foreign exchange markets in late July to support the yen so the Bank of Japan didn’t have to sell government bonds, which would likely have pushed up U.S. bond yields.
The effort has pushed long-term interest rates up from recent highs since before the 2008 global financial crisis, but market experts say the move is doomed to fail, especially if the U.S. doesn’t address its fiscal situation, with total debt topping $40 trillion and a budget deficit likely to top $2 trillion in 2026.
The latest critic to weigh in: Stanley Druckenmiller, the prominent head of the Duquesne Family Office and, perhaps more importantly, Bessent’s investment mentor. Together with George Soros, the pair famously orchestrated a bet against the British pound in the early 1990s.
Druckenmiller warned that without fiscal discipline, efforts to drive down yields are dangerous for both markets and Treasury credibility.
“If you have to trade at 5.5% to liquidate a 30-year bond, that’s not a crisis. It’s a bill,” he said in a Wall Street Journal op-ed. “Then do the only thing that will permanently lower long-term yields: address the primary deficit.”
“Subsidy for procrastination”
In an essay titled “Let the bond market speak,” Mr. Druckenmiller called on Mr. Bessent to abandon the buyback plan announced on August 19, taking the government out of the hands of the government and giving the market the opportunity to set an appropriate price for the bonds.
“Every reference point for artificial yield suppression is a subsidy to procrastination,” he wrote. “If the market believes the Treasury is protecting prices, then every rise in yields will test the authorities’ resolve and they will need to expand to survive the challenge.”
He added: “Governments that protect prices against fundamentals always lose. The only variable is how much they spend before making concessions.”
The Treasury Department did not immediately respond to CNBC’s request for comment on Druckenmiller’s column.
Mr. Bessent’s original plan was for the Treasury Department to double its repurchases of outstanding or previously issued securities to the usual $2 billion. The program was launched two years ago under her predecessor, Janet Yellen.
In addition, Treasury officials told CNBC this week that the department could use $935 billion in the general fund to fund bond purchases.
Still, there was some skepticism as to whether it would be enough to continue down that path. The General Fund is essentially the Treasury Department’s checkbook, used to fund government operations, and has limitations because it has been used during multiple debt ceiling deadlocks in Congress.
The recent moves are being compared to tools the Federal Reserve has used in the past to provide liquidity to bond markets and keep interest rates in check. One, called “Operation Twist,” involves selling short-term bonds and buying long-term securities. The other is called quantitative easing, which is when the Fed simply uses its own resources to buy up bonds.
The difference: Unlike the Treasury, the Fed is not constrained by a finite cash balance and can create reserves to fund purchases.
Fed’s position
“If the U.S. government is serious about controlling yields, the Fed needs to get involved,” Ryan Swift, chief strategist at BCA, said in a client note. “Unless the Fed rolls out its balance sheet, any efforts by the U.S. government to rein in bond yields will fail. In fact, they could even backfire if investors start to smell that the administration is getting desperate.”
But Swift believes Fed Chairman Kevin Warsh is reluctant to get involved. In his short time leading the central bank, Warsh has emphasized the importance of allowing markets to take advantage of price discovery.
“Market participants are learning to play ball, not referee, and market prices will continue to react in the direction and magnitude they see fit,” Warsh said after the July Fed meeting.
Like some others, Swift doesn’t see anything too alarming about the recent rise in yields, saying the 30-year bond is close to its “fundamental fair value” based on inflation, unemployment and market volatility, as well as the Fed’s benchmark interest rate and central bank expectations.
of 30 year bond is trading just slightly above the 50-year average of about 5.16%. benchmark 10 year bond As of Tuesday morning, it is actually trading at exactly the same level as its historical average of 4.64% dating back to the early 1960s.
“The message from the bond market is simple and clear: Fiscal or monetary policy should be tighter,” said Norshad Shah, head of fixed income sales for Europe, Middle East and Africa at Citadel Securities. “Preventing Treasuries from settling at lower prices doesn’t eliminate that pressure. It just shifts the pressure elsewhere.”
CME Group estimates that when the Fed next takes the floor at its September 15-16 meeting, markets are pricing in about a 40% chance of raising interest rates. Mr. Warsh is scheduled to speak at a symposium at the Federal Reserve Bank of Jackson Hole in Wyoming on Friday, during which he may address Treasury issues.
Krishna Guha, head of economic and central banking policy at Evercore ISI, said the chairman may try to avoid involvement.
“It will not be easy for Mr. Warsh to comment on yields in a way that reassures the market while avoiding conflict with Mr. Bessent’s unconventional behavior. Mr. Warsh may decide to hold off,” Guha wrote.
