Scott Bessent’s attempt to calm the bond markets and push down America’s cost of borrowing have attracted a rebuke from the US Treasury secretary’s former mentor.
The billionaire investor Stanley Druckenmiller, who worked with Bessent at George Soros’s fund management firm in the 1990s, has warned that his former pupil is courting danger by trying to suppress US bond yields.
Druckenmiller, writing in the Wall Street Journal, argued that the US should “let the bond market speak”, rather than expand its bond purchases in an effort to push up prices, and lower borrowing costs.
“Governments defending prices against fundamentals always lose. The only variable is how much they spend before conceding,” he wrote.
Druckenmiller argued that Washington should heed the rise in borrowing costs – measured by bond yields – and take steps to cut the budget deficit, rather than interfering in the market to push yields down again.
“The long-term Treasury yield is the most important price in the world. It is also the only fiscal disciplinarian the US has left. Neither party will run on entitlement reform. Both have spent the past decade expanding commitments while ignoring arithmetic,” he wrote.
Druckenmiller’s intervention comes after Bessent decided to at least double the maximum size of the Treasury’s buyback operations, from $2bn (£1.5bn) to $4bn. That move briefly led to a drop in US long-term bond yields, but this quickly reversed.
“The market’s verdict was swift and correct: This wasn’t liquidity management, it was price management – and a mistake far larger than $4bn suggests,” Druckenmiller said.
Bond yields fall when prices rise, and vice versa.
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Yesterday, CNBC reported that Bessent could increase his bond-buying firepower by conducting purchases using the Treasury’s near-$1tn General Account, a government fund held at the Federal Reserve.
Last week the US national debt hit $40tn, and rising, and the annual deficit is expected to hit $2tn this year.
Addressing this primary deficit is the “only thing that durably lowers long-term yields”, Druckenmiller wrote in the WSJ.
“The reward is enormous: A credible fiscal package would do more for the long end of the curve than a buyback program 1,000 times this size,” he said.
Bessent’s bond market intervention is a signal that “Washington is increasingly uncomfortable with soaring long-term borrowing costs,” said Axel Rudolph, the chief technical analyst at the investing and trading platform IG.
