“Oh good, Scott Bessent!”
Maybe that’s something people say in all sorts of contexts. Like, when Scott shows up at parties, for example. Donald Trump’s nominee for Treasury Secretary seems like a decent enough guy, particularly as Trump nominees go (and when he’s not lobbying for cabinet posts in distasteful Wall Street Journal Op-Eds and making dangerous suggestions about the institution of a parallel monetary authority in the US).
But I’d wager there’s scarcely ever been a time in Bessent’s life when so many people, all at once, said “Yay, it’s Scott Bessent!” as they did on Monday, when markets cheered Trump’s decision to go the safe route at Treasury. This is, after all, a President-elect who nominated an anti-vaxxer to head up the Department of Health and Human Services, and someone who Democrats only half-jokingly call a “Russian asset” to be director of national intelligence. (And please, do yourself a favor: If you don’t know anything about Tulsi Gabbard, then keep your mouth shut around me, because I do.)
Comparatively speaking, Bessent’s a regular “normie” and on top of that, he’s a billionaire hedge fund manager. So if you’re Wall Street, you like it. Love it, even: “Yay, it’s Scott Bessent!”
10-year US yields were down ~8bps early Monday in the US, a welcome reprieve at a time when bonds are flirting with a third annual loss in four years, something that’s only happened one other time in modern US history. Were the rally to hold, it’d be the second-best session for bonds since the early-August growth scare.
Even if yields reverse, the knee-jerk reaction to Bessent was telling. The relief — fleeting though it might be given that Trump’s policy positions haven’t changed — was palpable.
As discussed here over the weekend, stubbornly elevated bond yields threaten to cap risks asset gains, and there’s still a lot of consternation around the inevitable resumption of coupon increases at some future QRA. Markets wanted “an adult in the room,” and Scott’s that adult.
Bessent wants to, among other things, extend the Trump tax cuts (with “pay-fors,” although that part will almost invariably be forgotten and abandoned), implement Trump’s tariffs “gradually” to avoid shocks, eschew the temptation to pursue a weak dollar for trade purposes, cut the national debt (everybody says that, nobody does it) and term out Treasury’s debt profile (that’s another thing that’s easy enough to say — Scott’s not the first hedge fund manager to say it — but as any number of people tried to explain to Stan Druckenmiller during the Biden years, it’s not as simple as it sounds).
Bessent’s “in favor of pro-growth and deficit-reduction policies, and his nomination was greeted positively by markets worried about the size of the US budget deficit and the inflationary impact of tariffs,” SocGen’s Kit Juckes remarked, adding that “the nomination has been a catalyst for lower bond yields, higher equity indices and a weaker dollar.” Juckes sounded a somewhat guarded tone on the prospect that Scott will actually be able to effectuate any sort of meaningful shift as regards America’s fiscal trajectory, but said Bessent has “changed the market mood, if nothing else,” and “for now.”
In a morning note called “The Bessent effect,” BMO’s US rates team said “the bond-friendly logic is relatively straightforward.” That logic: “Bessent will keep a leash on deficits and take a thoughtful approach to tariffs.” “In short, another adult in the room is being viewed as a net positive for the US rates market,” Ian Lyngen wrote.
Steel yourself. We’re in for four years of dancing around the issue, which is just this: The President of the United States is supposed to be the adult in the room. And in every room, for that matter. Bear with me for a moment.
I’m 100% sympathetic to the idea that US presidents other than Trump, and all sorts of establishment political figures and centrists around the world besides, made a mockery of the word “serious.” In other words, if you want to call the people who pushed Western electorates into the arms of populists “unserious,” I won’t argue with you.
All I ask is that you concede that “unserious” means something entirely different in the context of, say, a Joe Biden than it does in the context of Donald Trump, who needs “adult supervision” because, left to his own devices, he’s avowedly — which is to say proudly — inclined to follow his “gut” which, as he once explained to The Washington Post, “tells me more sometimes than anybody else’s brain can ever tell me.”
I can hear the pushback now from Wall Streeters: Well, Trump’s right. His gut instincts will surely lead to better policy than the collective wisdom of the establishment which got us into this mess. To which I’d say: Ok, then why were you buying bonds on Monday? Why are you so excited about Scott Bessent?
Terming out the debt with a growing term premium? Interesting idea.
Well, Scott was basically making the same point a lot of other people have made: That Yellen should’ve taken advantage when long-end yields were very low to term out the debt profile. Conditions are obviously different now. I think he was just saying that if he were Yellen when long-end yields were where they were prior to the inflation shock and the rate hikes, he would’ve done things differently. That sounds good in theory, but what critics never mention is that… well, that’s just not how it works. Granted, her issuance strategy was absolutely motivated by political expediency at various intervals, and sure, she could’ve leaned harder into longer-end issuance than she did, but the inescapable reality is that the US Treasury has to (has to, has to) prioritize the maintenance of the world’s reserve currency and any number of other, related quasi-existential imperatives over the sort of issuance “strategery” Yellen’s many critics insisted she should’ve pursued. There’s a limit to Treasury’s capacity to shift the debt profile opportunistically, and besides, the sheer size of outstanding US public debt means it’s mathematically difficult (and probably impossible, depending on the tenor) to dynamically manage America’s WAM. This is a big-ass ship. You can’t just “pivot.” Basically, Scott (and Stan and all the rest) were talking out their asses for publicity. That’s all it was. Let’s see what Scott says when he’s suddenly in charge of all this. I mean, these guys think — you know — “Oh, I managed XYZ billions” and “I helped George break the BoE,” how hard can it be? Pretty goddamn hard, as it turns out. I understand why it’s tempting to scoff at establishment figures and talk about all the harm the’ve caused over the years, but contrary to popular belief, there’s a reason why, in a pinch, you appoint people like Janet Yellen to very important roles: It’s because whatever else you’re doing, you’re effectively eliminating the left-left-left-most tail, which is to say whatever else someone like a Yellen does or doesn’t do in a role like Treasury Secretary, she’s not going to blow up the universe. I think Scott strikes a good balance here, like Mnuchin: He’s Trumpy enough to get the nod and stay in the role, but he’s smart enough that once he gets in there, and his ops people say “Hey, Scott, we don’t want to come across as insubordinate or otherwise start things off on the wrong foot, but that thing you said that time about XYZ is just dumb as sh-t, and here’s why,” Scott’s going to listen, and as an extremely intelligent guy, Scott’s going to understand. Or at least I think (and hope) that’s the case.
Treasury cannot issue only 30 year or 100 year or whatever, if the demand is not there. There is some demand for ultra-long maturities, but trillions of dollars of sustained demand? I don’t think so – institutions buy Treasuries for specific purposes, and the “lock in ultra-low yield forever with ultra-high duration risk” purpose is niche, to say the least. Even if you did, then how does the global financial system operate without a goodly supply of liquid new issue Treasuries? The idea that Yellen could or should have termed out the US debt in 2020-2022 is unrealistic.
Let’s just hope the US Treasury’s fortunes don’t mirror the trajectory of Key Square, from raising $4.5BN to losing most of its clients and now running a few hundred million AUM.
I try to be generous where I can, but as noted in the article (and across any number of other articles), the truth is that the only way “Trump 2.0” is going to go well is by luck, by accident or by the grace of a few GOP senators. I worry a lot about the Gabbard thing. That’s really, really concerning, more so to me than virtually anything else I’ve seen from Trump since 2016.
Hey H, I remember you posted a great article about Drunkenmiller calling out Yellen as well. Do you happen to have the link? Would be good to re-visit and read. Thanks!
I was late to the article and had to chuckle at the line “implement Trump’s tariffs ‘gradually’ to avoid shocks”, having just read that Trump tweeted he is imposing 25% tariffs on everything from Mexico and Canada starting on January 20th. Good luck Scott Bessent!