Yields briefly declined, but then rose again (see chart 1). For the treasury secretary, falling bond yields would be a sign of success. An accountant might raise an eyebrow, though, on encountering a salesman who juiced his figures by purchasing his own wares. On August 19th Mr Bessent set out plans for the Treasury to buy back tens of billions of dollars’ worth of long-dated government debt. Might the wheeze not only fail, but also risk spoiling the brand?
Scott Bessent often says he wants to be America’s “top bond salesman”.
Most worryingly, bond markets are beginning to reckon with the consequences of the rich world’s debt binge. The Congressional Budget Office, a nonpartisan scorekeeper, expects both deficits and debt only to grow. Other big economies, notably France and Japan, are also in poor shape. That risks a vicious circle of rising yields, bigger deficits, still higher yields and so on. This is not just an embarrassment for Mr Bessent. It is also a problem for the Trump administration. The first is helping to cause the rise in yields; the second is its consequence. With his buy-backs, Mr Bessent is trying to put his thumb on the scale. Usually, the Treasury sees its role as keeping the bond market orderly and liquid during crises, not jostling yields around in what should be quieter times. Mr Bessent, sounding rather like the hedge-fund trader he once was, has taken a different view.
America’s budget deficit is 6% of GDP, the widest ever outside recession and wartime; on August 19th the Treasury said federal debt had passed $40trn (around 130% of GDP). Mr Bessent’s own target of reducing deficits to 3% of GDP by 2028 looks fanciful. Worse, more than half of America’s deficit now consists of interest payments on past borrowing (see chart 2). Yet the two most salient costs for many voters—petrol prices and the 30-year mortgage rate—are both moving in the wrong direction.
The midterm elections are ten weeks away and “affordability” is the word of the moment. “We believe that the yields don’t reflect the underlying fundamentals,” he said in a television interview after announcing his scheme.
But its goal has always been a short-term economic one, such as fighting recession or inflation, not keeping the government’s finances afloat. Mr Bessent’s announcement had only a limited immediate effect. Yields are already back to where they were before he made it. The buy-backs will not alter the total amount of American government debt, since they will be funded by issuing shorter-term bonds. And the amounts involved are small compared with the scale of America’s borrowing. More important is the signal the scheme sends to markets: that the Treasury is willing to resist if yields keep rising. But market moves driven by changes in economic fundamentals have a habit of overwhelming even the most determined governments. Another irony is that Mr Bessent criticised his predecessor, Janet Yellen, for politicising the Treasury and interfering with the work of the Fed. Under Ms Yellen, the Treasury nudged up the share of government debt issued at shorter maturities. That, like Mr Bessent’s buy-backs, shifted borrowing from long- to short-term debt. The buybacks are only the administration’s latest effort to resist rising bond yields. In July Mr Bessent structured his joint intervention with Japan to boost the yen in a way that minimised its impact on Treasuries, funding it through selling euros. Opening a dollar swap line with the United Arab Emirates, an idea reportedly under discussion, would ensure that the UAE, whose sovereign-wealth fund is a big holder of Treasuries, would not need to sell them in a crunch.
Mr Bessent, who in 1992 helped to break Britain’s currency peg while working for George Soros’s hedge fund, should know that better than most. In addition, over the past year Fannie Mae and Freddie Mac, the government-sponsored enterprises that package up mortgages, have increased their purchases of mortgage-backed securities in an apparent effort to push down mortgage rates, urged by Bill Pulte, their pugnacious boss, and President Trump (see chart 3). (Support for Argentina’s peso during a tight election fight for Javier Milei, the president, also illustrated Mr Bessent’s willingness to use American financial firepower for political purposes.)
The Federal Reserve—the other centre of power in American macroeconomic policy—does sometimes try to move bond yields, through programmes like quantitative easing (QE: buying bonds by creating bank reserves) or “Operation Twist” in 2011 (selling short-term Treasuries and buying long-term ones, a central-banking mirror of Mr Bessent’s scheme). Ironically, Kevin Warsh, the Fed’s new chair, who was picked in a process run by Mr Bessent, has disavowed QE and says policymakers should not leave a heavy footprint in markets. Ms Yellen’s Treasury called it technocratic debt management; Mr Bessent echoed criticism of this as “activist Treasury issuance” to juice the economy before the 2024 election.
