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Scott Bessent’s running battle with the bond market is starting to look like his boss’s war in Iran — started by his own hand with a tangled set of objectives, an underestimated opponent and an implausible path to victory. And like the conflict in the Middle East, we are all going to suffer its effects.
The latest skirmish came on Wednesday when, in an unscheduled announcement, Bessent’s US Treasury department announced that it would double the pace at which it buys back its own long-term bonds. Buybacks in themselves are a pretty standard bit of financial housekeeping, but to bond market wonks, a few things stuck out.
One is the unscheduled nature of this move. Painstaking predictability is the name of the game in dealing with the $32tn US government bond beast, particularly with the longer maturities. Bond investors do not like surprises, often reading support measures as an admission that something somewhere has broken.
The other is the context, because this is just the latest in a series of surprises Bessent has delivered in the most important financial market on earth.
Three weeks ago, of course, he inserted himself in the market for the Japanese yen, of all things, buying the currency to prop it up in what was painted as a friendly act of solidarity with an ally in need.
The link back to Treasury bonds may not be immediately obvious, but bond market insiders are not buying the friends-helping-friends explanation, and instead see it as an effort to stop Japan from fixing its yen problem by selling down its gigantic stash of US debt. The icing on the cake: Bessent said any future yen interventions will use a highly unusual facility — crucially, one designed explicitly to avoid the immediate sale of Treasury bonds.
So now, no fewer than three times in three weeks, Bessent has given the message to investors to please stop selling his bonds. But they are selling his bonds anyway, taking borrowing costs to extraordinary heights in the same week the US national debt crossed the $40tn line for the first time. Worse, investors are now selling the currency too — the dollar took a sizeable hit after the buybacks announcement, from which it has not recovered.
Bessent’s reaction has been to offer yet more support for long-term bonds, to suggest runaway economic growth will magic all the debt away, and to tell the bond market it is wrong and failing to reflect fundamentals. Investors will be keen to see his promise of tighter fiscal spending bear fruit quickly.
It is worth keeping in mind that poor trading conditions typical of August amplify all sorts of stresses. Some odd distortions are also in play, including the effect of massive long-term debt issuance by Big Tech companies, which is pulling funds away from their usual home in global government debt. Investors say some government borrowers in Europe have even altered the timing of their own deals to try and dodge the impact of these vast tech transactions. The annual rush of new bonds this September could get messy.
Niggly factors like this aside, though, investors know that a market experiencing weakness in its bonds and its currency at the same time is one in a very tricky spot. As a combination, it reflects a broad decline in confidence. Bessent is lucky that, so far, stocks have been insulated from the fallout thanks to bumper earnings at US companies.
But bear in mind that Treasuries and the dollar are the world’s pre-eminent safe assets — by tradition, bolt-holes in times of stress. Now the stress is pushing them down, while gold and the Swiss franc are climbing as investors seek shelter elsewhere. The long-running fissures in the status of core US assets are widening, and confidence in their ability to act as a haven is in decline.
Emerging market specialists, still bearing the scars of Turkey’s tussle with its bond and currency markets nearly 10 years ago, are cracking a wry smile. For UK government bond veterans haunted by the Liz Truss disaster of 2022, Treasuries are starting to look like gilts in an expensive suit and with good teeth.
So far, US projections of strength have been interpreted as expressions of weakness. This is unfortunate. If Treasury yields keep rising, other countries will end up paying more to borrow too.
This means the task falls to Kevin Warsh, chair of the Federal Reserve, to try and steady the ship at the Jackson Hole economic symposium in a few days’ time. This would be tricky for anyone, but particularly for someone whose stated preference is to say less and let the markets, which Bessent says are misfiring, do the work for him.
The fact that Treasuries are at the moment behaving more like gilts than like rock-solid superpower bonds makes this even harder. A hint at interest rate cuts — usually a boost to Treasuries — would weaken the bonds still further in this new regime, even if it pleased President Donald Trump.
The effort under way today to boss markets around and tell them they are wrong is not having the desired effect. Honestly, it never does. A course correction to shore up confidence is desperately needed.
