Bessent bounce fades fast: Markets reject Treasury buybacks

Well, good morning — apparently Scotty’s magic lasted all of about 24 hours and stocks and bonds got slammed…. So put that cork back on the champagne bottle because there is a story here.

Let’s remind ourselves of what happened on Wednesday. Scotty stepped into the bond market and surprised investors by announcing (mins before the opening) that the treasury would at least double the size of its buybacks of longer-dated securities — an attempt to improve liquidity at the long end of the curve after the 10-yr and 30-yr yields surged into what I have been calling the danger zone.

Markets loved it…Investors, traders and the algo’s loved it. Bonds rallied. Yields fell. Stocks moved higher. Gold surged and for one full minute it looked like Scotty was onto something.

And then Thursday happened. Everyone took a second look at what the treasury was proposing. They looked at the $40 trillion national debt, they looked at a federal deficit running near 6% of GDP, they looked at the enormous amount of treasury AND corporate debt coming to market, they looked at oil surging again and apparently decided:

Yeah...no! Not happening! And what happened next wasn’t so pretty…. They sold bonds and they sold stocks and that sent yields right back up.

For bonds – the TLT lost 0.8% while the TLH lost 0.6% and that sent yields higher – the 10 yr back at 4.69% and the 30 yr took back 5.24% - essentially wiping out most of the gains that Scotty had manufactured just one day earlier.

And equities? Not good. The Dow got whacked — losing 704 pts, or 1.3%, the S&Ps gave up 66 or 0.9%, the Nasdaq lost 265 pts or 1%, the Russell lost 40 pts or 1.4%, the Transports lost 78 pts or 0.4%, the Equal Weight S&P lost 75 pts or 0.8%, while the Mag 7 lost 380 pts or 1.1%.

So much for the Bessent bounce. And THAT is the message. Yesterday, the bond market rejected the idea that a technical fix solves a fundamental problem.

Yes, Scotty can increase buybacks, temporarily improving liquidity. He can change the maturity profile. He can tell investors that yields don’t reflect the underlying fundamentals and he can tell us that “anything that happens within a 24-hour period is noise.”

Noise? Noise? How about a cacophony? Because what we got yesterday was loud, confused and anything but harmonious.

Okay. Think about it - you intervene on Wednesday – mkts rally and then they completely reverse that move on Thursday. That’s not noise. That’s the bond market saying ‘not so fast big boy’ – while we understand what you want to do – we’re not convinced it’s going to work.

And Scotty heard the message because he came right back and upped the ante again. Now, does that start to feel a little desperate? Maybe. Because suddenly he’s telling us the buybacks could be even larger than the $4 billion per operation already planned while revealing that the administration is preparing a new initiative focused on “fiscal consolidation.”

Fiscal Consolidation? Oh boy…what’s that you ask? Well, it is a completely different animal than bond buybacks and I need to explain the difference.

Bond buybacks are ‘debt management’. Fiscal consolidation is ‘deficit management’. You see - Wednesday’s announcement attempted to manage the existing debt — improve liquidity, change the maturity profile and potentially take some pressure off the long end of the curve.

Yesterday’s announcement is attempting to address the reason the bond market is upset in the first place - too much spending, enormous deficits, too much debt and too much new issuance.

And the fiscal consolidation plans to address it - Spend less. Collect more. Grow the economy faster. Reduce the deficit and BORROW LESS.

Because if Washington can credibly reduce the annual deficit (and that is the question) then we don’t need to issue enormous amounts of debt every year. Which brings us right back to the supply/demand narrative.

Less supply means less competition for capital means potentially less upward pressure on yields.

But there’s something else that would help - Credibility.

Because if investors become convinced that Washington is actually serious about changing the trajectory of deficits and debt, they may demand less of a risk premium to own long-dated Treasuries. And THAT is really what Scotty needs. He doesn’t just need buyers. He needs buyers who don’t demand 5.25% to show up.

And remember – Scotty isn’t the only guy standing at the capital-market window looking for money. Corporate America is standing right next to him. Bessent acknowledged that the enormous wave of corporate debt issuance is creating short-term competition for capital.

Bingo! We discussed this in yesterday’s note…supply/demand and the clearing price!

And if that wasn’t enough oil just made his job even harder because it surged again yesterday…. WTI gained $2 or 2.4% to end the day at $86.37 – Brent ended the day at $93.80. Oil is now up 18% since August 5^th…Oh boy just think about what the CPI and PPI are going to say next month.

Now, the latest move is because Trump turned up the heat again — threatening other countries (Oman was just one) that continue to support Iran. In addition – next Monday is being called ‘Economic D-Day’ for Iran – because we are supposed to find out how he intends on economically isolating Iran from the global economy.

Okay — but here’s the problem. Bessent continues to tell us that the underlying economy remains strong and argues that the only meaningful inflationary issue is energy - something he continues to tell us is temporary. Nightmares of Transitory come to mind. How’d that work out?

Now, large amounts of oil ARE still getting through the Strait - and that is one of the reasons Brent isn’t already trading above $100. But what happens if Trump’s Economic D-Day changes the calculus? What happens if shippers, insurers, banks and buyers decide the risk isn’t worth it? And what happens if Brent moves through $100?

Now Scotty has a new problem…..Because while he’s trying to push long-term borrowing costs DOWN, rising oil is threatening to push inflation expectations and long-term yields UP.

So, he can try all he wants to lean into the long end. He can try to change the maturity profile. He can increase the buybacks, but he can’t simultaneously tell us that energy inflation is temporary while the administration is pursuing a policy that could potentially make energy inflation ‘less’ temporary.

And gold? It gained another $27 to settle at $4,516/oz - leaving it up more than $150 in just two days. So, think about the message: stocks down, long yields up, oil up and gold up. That’s not exactly the market screaming “Everything is fine.” Gold is telling you that fiscal, inflation and geopolitical risks remain alive and well.

And THAT takes us right back to the bond market and then the stock market…

Oil moves up, inflation pressures move up, the FED gets squeezed, long bonds get crushed, yields move higher - and higher yields put pressure on equity valuations. And sitting right in the middle of all of it is the bond market. And what we learned again yesterday? The bond market takes no prisoners.

And there it is…It’s not any more complicated than that.

And by the way - WMT didn’t help. The company beat on both earnings and revenues, but US comp sales disappointed and management pointed to consumers beginning to make trade-offs as gasoline prices rise. THAT matters. Because higher oil isn’t just a bond-market problem anymore — it can become a consumer problem. Remember our line from Monday: Cooling is good. Cracking is not.

This morning – US futures are UP…. Dow futures +200, S&P’s up 25, Nasdaq is up 183 while the Russell is up 15 pts.

The early explanation for the bounce is that we’re in a short-term oversold position. Okay— but I’m not buying that argument. The RSI isn’t saying it, the data isn’t saying it, and the chart isn’t saying it. So, my gut says this early bounce is more about traders testing the waters after yesterday’s beating than some sudden change in the fundamental story. And while the trader types may find a short-term opportunity or two, I continue to think the near-term risk is lower as we move toward September.

Trendline support is down at 7,530…. which is down 1.3% from here…hardly anything to write home about. The issue is – will that level hold or not? If not, then 7350 ish (which is intermediate trendline support) would be in the bullseye….. And a move there would be a 5.7% move off of the mid-August highs of 7800. Now, if that doesn’t hold – then we can have a different conversation – but I’m not there yet!

This morning – European markets are slightly positive up 0.2% with the exception of Spain which is up 0.75%.

Eco data today includes August US Manufacturing and Services PMI – both expected to remain in the Expansion Zone.

The S&P closed at 7,641 – down 66 pts…. Now while I think we move lower in the short term – I am still upbeat on the economy long term…. Yes, this is a bit uncomfortable, but it is not a surprise at all. Remember - Scotty can buy bonds and he can up the ante to buy more, but what we learned yesterday is that just buying bonds is NOT going to solve the issue.

Not your kid's mac and cheese

This is a rich, grown-up version of Mac & Cheese—The combination of Gruyère and American cheese makes it creamy and flavorful, while the buttered breadcrumbs and Parmesan topping add a perfect crispy contrast.

The method of cooking the pasta in a milk-infused broth is a great trick for extra creaminess without needing a roux. This is pure comfort food with an elevated twist—warm, indulgent, and absolutely perfect for a stressful day.

Prep time

10m

Cook time

15m

Total time

25m

Serves

6-8

Ingredients

2 c whole milk.

1 lb elbow macaroni.

10 oz shredded American cheese.

10 oz Shredded Gruyere cheese.

1 tsp Dijon Mustard.

2/3 c bread crumbs butter s&p freshly grated parmegiana cheese.

Preparation

Step 1

Preheat the oven: Set your oven to broil so it’s ready when needed.

Step 2

Bring 3 1/2 cups of salted water to a boil. Add the milk and stir. Now add the macaroni and reduce the heat to medium-low. Cook for about 6 minutes, stirring occasionally, until al dente. The pasta should absorb most of the liquid. If there is excess, strain it off.

Step 3

Melt the cheese: Once the pasta is ready, add the shredded American cheese and Dijon mustard. Stir continuously over low heat until the cheese is fully melted (about 1 minute). Remove from heat and stir in the Gruyère cheese to evenly distribute.

Step 4

Transfer to a baking dish: Butter a Pyrex dish (or an oven-safe baking dish) and pour in the mac and cheese mixture.

Step 5

In a frying pan, melt 1 tbsp of butter over medium heat. Add the breadcrumbs and toast lightly until golden brown. Remove from heat and spread the toasted breadcrumbs evenly over the mac and cheese.

Step 6

Top with cheese & broil: Sprinkle freshly grated Parmigiano-Reggiano cheese on top. Place the dish under the broiler on the middle rack and broil for 1-2 minutes, or until the topping is golden and crispy. Keep a close eye to prevent burning.

Step 7

Serve & enjoy: Remove from the oven and let it sit for a minute before serving. Dig in and enjoy this ultimate comfort food!

Step 8

Yum!