Mr. Bessent’s efforts in the U.S. Treasury market have so far been unsuccessful. Here’s what else he can try

Treasury Secretary Scott Bessent argued Thursday that he has multiple weapons at his disposal to quell liquidity problems in the Treasury market and restore calm.

That’s true, but his two-pronged effort to date — accelerating share buybacks and convincing the market to accept his rationale — has had little success.

The Treasury Department said Wednesday it would at least double its bond purchases starting in early September, sending yields lower as investors praised the backstop for longer-maturity bonds.

But long-term interest rates quickly rose again on Thursday as market experts expressed skepticism about whether the push would be successful against a range of factors working against U.S. Treasuries.

And on Thursday, Bessent appeared on CNBC and asserted that the intervention was simply aimed at providing market liquidity, not trying to control the yield curve. Yields initially fell slightly, but quickly rebounded amid criticism of the way the previous day’s announcement unfolded, with one analyst characterizing the emergence as having “minimal impact” on market pressures.

Still, Bessent is left with a range of options he can choose to implement.

“We have a big toolkit,” the Treasury secretary said. “Part of that is the signal here, to show that we believe yields are not reflecting underlying fundamentals.”

But the market remains concerned, with the size of the share buybacks Bessent identified could exceed $4 billion, prompting criticism that they would be ineffective in such a large market.

Krishna Guha, an analyst at Evercore ISI, called the plan “a weaker form of Operation Twist,” an effort by the Federal Reserve to exchange long-term bills and bonds for short-term notes. He said the move itself “will have little lasting impact and could be counterproductive if it is seen as a sign of concern about the ability to provide long-term financing at an acceptable cost.” He added that the press conference had “minimal impact on the bond market.”

That leaves Mr. Bessent with several other options, none of which are guaranteed to work and each comes with its own risks.

Bigger and more frequent share buybacks: Mr. Bessent simply said the first round of incremental share buybacks went so well that the Treasury is getting even bigger. Smaller bids: The department could simply reduce the level of long-term debt it issues and shift it to short-term securities, an approach that Bessent strongly criticized when her predecessor, Janet Yellen, adopted it. Changing the maturity structure of outstanding bonds: This is essentially a larger version of a small auction, requiring market participants to buy bonds with shorter maturities and lower yields, which is a risky proposition. “Global investors know that distressed sovereign nations often rely on short-term issuance,” Guha, head of economic and central banking strategy at Evercore, said in a note to clients. “We believe the United States is different, but not infinitely different.” Security guard. “We believe this is much more suited to a tactical guerrilla operation, the smoothed version, that catches shorts by surprise and imposes losses, slowing fundamentals-driven yield movements and creating a perception of two-sided risk that may prevent overshoot,” Guha wrote. “The problem is that this may not have much of a lasting impact on yields in the months ahead.”

Whatever path Mr. Bessent chooses, he could choose to do nothing and let the market decide, but he could face credibility issues from a market already growing skeptical and wary of the challenges facing the Treasury.

Thomas Simmons, chief U.S. economist at Jefferies, complained that the stock buyback announcement itself was inappropriate. He noted that the move came two weeks after the Treasury announced its quarterly repayment plan, but there was no indication in that time that the Treasury was considering changes to its share buyback program.

“This runs counter to Treasury’s long-standing strategy of making ‘regular and predictable’ announcements and using the refund system to announce nearly all policy changes and guidance,” Simmons wrote. “We believe it is fair to say that this disruption to their communications strategy reduces the overall credibility of their guidance.”

Additionally, Simons added, “The sloppy wording of the release’s headline gave the impression that this was a hasty decision.”

The challenge for Bessent, therefore, may be that efforts to rein in long-term interest rates could give investors another reason to demand more compensation.

Not all of the factors at play are fundamental, Bessent told CNBC on Thursday. These include increased competition from corporate bond issuance and the sudden attractiveness of yields on other sovereigns, including Japan’s. The correlation with oil prices increases concerns about inflation. and the increase in term premium, or additional yield sought by investors.

Mr. Bessent may seek cooperation with the Federal Reserve to address these issues. While Fed Chairman Kevin Warsh has emphasized the importance of letting markets set interest rates, Bessent suggested Thursday that the two agencies would “work together” to address complexities in bond markets and as the central bank manages its own Treasury holdings.

A number of variables arise during the paradigm shift in the U.S. and global government bond markets.

“There’s also a structural shift in who buys U.S. Treasuries,” said Atsi Sheth, chief credit officer at Moody’s Ratings. “New buyers such as leveraged hedge funds operating relative value strategies are playing a larger role as central banks shrink their balance sheets and traditional duration buyers reach the limits of the amount of additional issuance they can absorb.”

On top of that, the United States faces a daunting fiscal situation with a budget deficit of nearly 6% of GDP, or about three times the average from the end of World War II until the coronavirus pandemic. This is exacerbating the national debt problem, which has just surpassed $40 trillion.

With President Donald Trump desperate for tax cuts and Congress showing little sign of reining in spending, fiscal problems are likely to grow. To that end, Bessent said he plans to meet soon with Russell Vought, head of the Office of Management and Budget, to discuss “fiscal consolidation,” commonly understood to refer to efforts to reduce the deficit.

“It’s a combination of budget deficits, borrowing needs, inflation expectations, not really knowing what future Fed policy will be, and the sustainability of being able to issue ever-higher levels of U.S. Treasuries and the required interest rates,” said Joan Bianco, senior investment strategist at Bondblocks. “There’s just this idea that there needs to be a higher risk premium for every issue.”