Earlier this week, I suggested Scott Bessent had a burgeoning PR problem.
On Monday, the US long bond extended last week’s selloff before cheapening all the way to 5.33% on Tuesday, the highest since 2007. Although yields slipped back to 5.28%, the situation remained dicey mid-week.
The optics aren’t great. The US paid the most at a 30-year auction since 2001 at last week’s long bond refunding, underlining the Trump administration’s failure (I don’t know what else to call it given how specific Bessent was early on about The White House’s desire to bring down longer-end yields) to create a more favorable backdrop for duration.
Fast forward to Wednesday and Bessent moved to address the situation with upsized buybacks. You know, to “promote liquidity.”
From September 9, Treasury will “at least double” the size of buyback operations from 10-years on out the curve to $4 billion from $2 billion.
As the figure shows, Bessent got the result he was doubtlessly after. The long bond rallied the most since February, as yields fell more than 9bps in the knee-jerk response to the news. The new, upsized operation cap will be in effect until the next QRA in November.
In the press release, Treasury said longer-dated nominal sectors on the curve enjoy “consistent strong sponsorship from market participants.” (What? You can’t tell?!)
This doesn’t change the fundamentals, and I doubt seriously it’ll be enough to interrupt the bear steepening trend for more than a day or two. Upsized buybacks address exactly none of the factors driving the selloff.
If Bessent’s considering cutting coupon auction sizes late next year (as some suspect), he may want to consider bringing forward that decision to early 2027. Particularly if the high-grade credit market continues to boom with new AI-related issuance.
“Even though nominal coupon auction sizes have been left unchanged for the past few years, the growth of duration supply in US fixed income has emerged as a structural headwind for the long-end of the Treasury market,” BMO’s Ian Lyngen remarked on Wednesday. “The bond selloff has thus far been met by a fairly contained response in risk assets [but] started to have a more visible impact on equities this week.”
“We have consistently argued that bond yields would need to rise further than most expect before triggering a risk-off move in equities,” SocGen’s Manish Kabra offered, in a short Wednesday update. “Another 50–60bps rise in the US 10-year yield would push the risk premium towards the 3% ‘danger zone,’ making bonds cyclically more attractive than equities,” he added.
If all else fails, maybe Donald Trump can “suggest” to Kevin Warsh that the Fed ramp up bond-buying again during their next “infrequent” phone call.
“This increase in buyback operation sizes reflects Treasury’s desire to provide greater liquidity support in longer-dated nominal sectors where there is consistent strong sponsorship from market participants, as evidenced by the significant volume of high-quality offers Treasury routinely receives in longer-dated buyback operations”
Market participants clamoring to offload their bonds evidences their strong sponsorship, interesting. I guess I’ve been picking stocks wrong all my career, duh. Need to find the stocks with more sellers than buyers.
This seems like one of those instances where someone tries to make some token gesture to ease the market’s mind without spooking it but then ultimately ends up undermining confidence and has to dramatically expand the intervention.
It’s like a weak poker player who tries to bluff with a few chips but then gets sucked all in with a terrible hand.
Now that I think about it, an Iran war analogy may also fit.
And gold goes a rippin
Is it still QE and balance sheet expansion if the Treasury does it and not the FED? Oh well I guess I answered my own question.
I think Bessent moved too early here, perhaps due to the coming election. Throughout the 80s and 90s we had 30-year rates — and even 10-year rates — that were above 5%, and that was a period of good economic growth. It’s hard these days to truly say what “normal” is anymore, but if rates were a tad higher — and the market were a tad lower — that wouldn’t necessarily be a bad thing. A higher interest rate for savers is likely one component to reversing our current “K-shaped” economic conundrum. If more people saved money in simple bank accounts, banks would have more money to lend. (And eventually, banks competing to make loans should lower lending rates while spurring economic growth, but I have gotten too far ahead of myself, no?)