Jonathan Levin
With the midterm elections less than three months away, President Donald Trump’s Treasury Department is starting to look desperate about the soaring cost to borrow.
The Treasury said it would increase its buybacks of longer-term government bonds “by at least double”, an amount that analysts figure would bring purchases to $US32 billion ($45 billion) per quarter. Make no mistake about the motivations: 30-year bond yields this week hit their highest since 2007, pushing borrowing costs higher for the government, businesses and consumers.
Key mortgage rates are back up to around 7 per cent, a fresh blow to voters that were promised easier financing conditions under this government and ended up getting more of the same. US public debt surpassed $US40 trillion for the first time, and has now surged by a third in less than five years, as US lawmakers continue to shrug off calls to contend with historically wide fiscal deficits.
In many ways, hedge fund manager turned Treasury Secretary Scott Bessent is doing his best impression of King Canute, whose attempt to command the incoming tide to stop inevitably failed.
The Treasury described the buybacks, planned to start September 9, as a form of “liquidity support” — which is what they were intended to be when the program was created in 2024. In this case, “liquidity support” is a clever euphemism for “please bring yields down!”
It’s an inappropriate co-opting of a program that was created to improve market functioning and the government’s cash management, and, as explicitly described by the previous administration, was “not intended to ameliorate periods of acute market stress” — like now. But that’s the way the market sees it, driving yields on 30-year Treasuries lower by as much as 0.10 percentage point on the news.
The market’s reaction isn’t surprising. This is only the latest ill-conceived attempt at influencing market forces by the Bessent treasury, which has failed in its stated goal to get longer-term borrowing costs lower. In the administration’s 19 months in office, he has adjusted capital requirements to encourage banks to hold more bonds; supported the GENIUS Act which established a framework for stablecoins to invest in US government securities; and authorised US support for yen intervention, a move that looked custom-designed to dissuade a major foreign holder of Treasury bonds from dumping them to buy its own currency.
Don’t expect today’s bond market move to last very long. For those keeping score, none of the above moves have made much of an enduring difference. The effects of the yen intervention in late July started fading almost immediately. And even though the buybacks will double from $US16 billion on a quarterly basis, it’s still minuscule given both the size of the $US31.5 trillion Treasury market and the massive global forces keeping longer-term Treasury yields from falling.
For one, inflation is making a comeback in Japan after a quarter of a century of quiescence. Japanese 10-year government yields, which compete for the money of foreign investors with Treasuries, are now roughly at their highest in 30 years. With the Bank of Japan expected to resume lifting benchmark interest rates by October, the move higher in yields may be just getting started. In the interconnected global financial system, that’s an earthquake that is being felt in all bond markets – and certainly not one the US can counteract with $US32 billion of buybacks per quarter.
Also working against Bessent’s scheming is the fact that longer-term investment-grade corporate borrowing has surged to support the buildout of artificial intelligence. Earlier this month, Alphabet sold $US25 billion of bonds in dollars with maturities of up to 40 years. Amazon and SpaceX have likewise been among recent issuers of longer-dated bonds, with bond investors starting to show signs of indigestion.
Where the administration actually has a chance to meaningfully and responsibly impact borrowing costs, it has mostly declined to do so.
Thanks to the extension of tax cuts to the wealthy last year, the US continues to post record budget deficits, with the shortfall on pace to grow by 5 per cent from 2025. Persistently warm inflation, fanned by Trump’s tariffs and the oil shock from his war with Iran, has also done its part to keep borrowing costs higher. (And while Trump didn’t start the inflation, he’s consistently missed the opportunity to end it.)
One generous interpretation of these developments is that Bessent is effectively making a market-timing bet. By combining buybacks of longer-term bonds with issuance that’s front-loaded in shorter-term securities such as Treasury bills, Bessent is wagering that yields will be lower in the months or years ahead – and that inflation, the AI borrowing glut and the Japanese market moves are transitory. If he is right, Bessent would be vindicated, but it’s the longest of long-shot bets.
Treasury shouldn’t be in the business of using taxpayer money to time markets like a hedge fund. Don’t forget that Bessent attacked his predecessor, Janet Yellen, for ostensibly similar tactics.
If he’s wrong, which is highly likely, this will all go down as a brash attempt to paper over the reality of global bond markets: yields are going to stay relatively high for a considerable time, and the Trump administration will inevitably disappoint the voters that it courted with the promised lower borrowing costs.
Bloomberg
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