Bessent’s Interventions Have Fizzled. The Real Problem Is the Deficit.

Treasury Secretary Scott Bessent outside the West Wing of the White House on Aug. 20. (Jim Watson / AFP via Getty Images)

The BBB bond rally fizzled this past week. The Bessent Buy Back plan raised bond prices and lowered yields after the Treasury Secretary announced on Wednesday a surprise doubling of purchases of outstanding long-term maturities to be funded by issuance of short-term bills. But by Thursday, those moves largely reversed, leaving yields only marginally lower than before the announcement.

The episode recalled the market reaction after the intervention to prop up the Japanese yen a couple of weeks earlier, which was engineered by Treasury chief Scott Bessent in conjunction with Tokyo monetary authorities. After the operation on July 29 temporarily strengthened the yen, it has since retraced more than half of the move.

There is a more fundamental link between the two operations. On both sides of the Pacific, authorities were attempting to resist the rise in bond yields, which have been pushed higher by record government debt. (By sheerest coincidence, the announcement of the Treasury scheme to boost the buying of outstanding long bonds, to $4 billion per operation, came hours before U.S. government debt hit the $40 trillion mark, or 120% of gross domestic product.) Japanese long-bond yields have also soared to a record as its debt-to-GDP ratio topped 230%.

While U.S. and Japanese authorities tried to tamp down long-term borrowing costs, the pressure was felt in the currency market, as described in this space two weeks ago, following the yen intervention. After the U.S. bond buyback announcement, George Saravelos, Deutsche Bank’s highly respected currency chief analyst, similarly wrote that if the market price of Treasury securities isn’t allowed to adjust lower, the foreign-exchange price of Treasuries owned by global investors has to adjust via a weaker dollar. Since its peak in late July, the U.S. Dollar Index has dropped 2.9%, only partially due to propping up the yen. Gold , meanwhile, is up 15% from its recent low in mid-July.

Nevertheless, it seems as if the Bessent Treasury was displeased with the rise at the long end of the yield curve, according to a client note from Carl Weinberg, chief economist of High Frequency Economics. That came even as short-to-intermediate yields had eased over recent weeks in reaction to cooler inflation and employment numbers, steepening the yield curve.

The scheme to buy back longer bonds recalls the Federal Reserve’s Operation Twist of the early 1960s, when the central bank bought bonds (to help the domestic economy) while selling shorter-term securities (to support the dollar under the Bretton Woods fixed-exchange rate system).

The Treasury cannot “print money” to buy T-bills and so must rely on market demand, Weinberg adds. If the Fed stepped up purchases of T-bills to accommodate the Treasury’s issuance of short-term paper to limit the supply of longer-dated obligations, it would be widely viewed as inflationary money printing.

“Call this a scam, if you will, to force the Fed into a backdoor easing of monetary conditions without forcing it to cut policy interest rates,” Weinberg asserts.

And it could backfire. “If investors conclude that Washington is increasingly trying to manage long-term borrowing costs rather than addressing the fiscal deficit itself, they could eventually demand a higher term-premium to hold long-dated Treasuries,” wrote Ipek Ozkardeskaya, a senior analyst at Swissquote, in a client note. “And if investors start believing that the Fed is becoming a ‘sock puppet’ of the White House to keep rates lower and reduce pressure on borrowing costs, the Fed would lose credibility, making the entire yield curve harder—not easier—to control.”

Yet a day after Bessent’s buyback plan was announced, President Donald Trump renewed his call for lower interest rates. He asserted on Thursday that “25 years ago, when the country announced good numbers, interest rates went down because we had a stronger country.” Contrary to these alternative facts, in 2001, the Fed was cutting rates to counter the post-dot-com-bust recession. And during the last technology boom of the late 1990s, short- and long-term interest rates were rising, as demand for capital pushed up borrowing costs, just as the financing surge for artificial intelligence is doing now.

The core problem with Bessent’s gambits is that they address the symptoms and not the root cause of the problem: The U.S. continues to run a 6% budget deficit in an economy near full employment, as the Treasury team led by Jay Barry at J.P. Morgan writes. Without credible action to reduce the deficit, they see a higher term premium (the extra yield investors demand for longer-term debt).

Meanwhile, looking ahead to the midterm elections, a Democratic takeover of House of Representatives (likely, according to most polls) and the Senate (a toss-up, according to prediction markets) would make fiscal responsibility even less likely.

Finally, investors should also heed the message of the commodity markets, according to Jeffrey Currie, chief strategy officer of Altis Partners and former head of Goldman Sachs’ commodity research. “Scarcity in the physical world. Repression in the financial one,” he posted on X.com.

Chokepoints are proliferating, from the Hormuz Strait to the Red Sea, the Rhine, the Panama Canal, the Black Sea, and in Russian refining capacity, he pointed out. Even while crude oil prices remain below earlier peaks because of the Iran war, diesel fuel prices are surging, hitting transportation and farmers.

Fiscal and monetary authorities can manipulate interest rates, but they cannot produce real goods. They face an increasingly inflationary scenario that will be a drag on growth while they struggle with debt and defense constraints. Good luck, Secretary Bessent.

Write to randall.forsyth@barrons.com

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