The problem with Scott Bessent’s rationale for upsizing US Treasury buybacks is that it’s a lie.
Typically when I offer that sort of curt snark I add a caveat to acknowledge I might’ve overstated the case. Here, though, “lie” is barely an exaggeration if it’s an embellishment at all.
The purpose of Treasury buybacks is (primarily) to provide liquidity for off the runs. That’s not the only purpose, and in the event of serious dislocations or broad concerns about market function, Bessent would be well within his remit to expand program limits to address the problem. (Indeed, he’d be derelict if he didn’t.)
But as more than a few observers were keen to point out last week, there’s not a lot in the way of evidence for Bessent’s contention that market functioning’s impaired or that liquidity’s “very poor,” as he put it during a botched interview with CNBC. Or at least not beyond what you’d expect this time of year.
The figure below, from BMO’s Ian Lyngen, underscores the point. It shows bid-asks for the long bond both on a daily basis and as a one-week moving average.
One “key” reason for the “credibility concerns” voiced by critics last week was “the fact that [Bessent] upped the size of liquidity support buybacks at a moment when there weren’t any particularly concerning liquidity-driven market dislocations,” Lyngen remarked.
In the same dispatch, Lyngen noted that although the long bond bid-ask had reached ~40bps, a four-month wide, prior to Treasury’s announcement of the upsized buybacks, the spread was nevertheless “much tighter than it was in prior episodes of more acute liquidity strain.” It was double that during the SVB crisis, for example.
Coming quickly full circle, that’s why Bessent’s gambit was eyed so skeptically. The fact that the mid-terms are less than three months away added to the market’s collective cynicism.
So if he is sufficiently sophisticated that he knows finding a chart which exposes his lie is easy to do, who is he lying to? Certainly not the sophisticated traders, who by the way are capable of pressuring higher interest rates. So if he is not afraid of higher interest rates what is he afraid of? Is his primary fear a lack of a crisis to control in November?
Bessent is caught up in the dynamic that always happens with toxic leaders. The toxic leader makes bad and contradictory decisions and expects his underlings to figure out how to reconcile mutually exclusive outcomes. I’ve never been more miserable than when I’ve been in those situations personally.
I hope you are correct and my proposition is wrong.
Also a major cause of stress!
When I had this happen in my career, I always tried to put it in perspective- at least I could walk away if I wanted, unlike if one is in the military and ends up under a leader like this…
Well said day job. Haphazard frenetic decrees from a mercurial leader who will never take any responsibility, are the worst situations for underlings stuck with cleaning up the mess.
At some point, I would think that Bessent is weighing the pros and cons of doing something that he doesn’t agree with, vs. resigning.
If not now, almost certainly sooner or later!
Financial Times:
“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.
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.
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.”
“Bessent has given the message to investors to please stop selling his bonds. But they are selling his bonds anyway.”
Imagine that.
He has that “Please clap” energy.
Who in their right mind would lend money to Trump ,Bessent , Warsh at only 5.1% ?
For Trump himself, given his track record of BKs, 15.1% might be cheap. Seems like doing likewise to the USA is his legacy (“crowning” achievement)!
I always wonder: ”what is the real story?” whenever I read anything about this administration.