Judgments on Bessent’s bond market interference are still coming in hot and heavy

Outlook

Judgments on Bessent’s bond market interference are still coming in hot and heavy. The thing to remember: government interference in markets always leads to misallocation of resources. Sometimes it’s worth it, as in safety regulations. Making the argument that there is a noble outcome behind this one is a whole lot harder.  The argument is that it broke a panic freakout, so perhaps that is enough.

Critics note the timing could have been better. On the same day as the intervention, the US debt rose over $40 trillion for the first time. See the chart from Mish, who points out we need to strip out intergovernmental debt to get the effective number.  “The real macroeconomic danger zone is the Debt Held by the Public, which has relentlessly surged to $32.26 trillion. This is the net amount of Treasury bonds, notes, and bills held by outside investors, including global central banks, domestic banks, mutual funds, and private citizens. 

“Every single dollar of this $32.26 trillion must be actively financed on the open market. Unlike intragovernmental debt, public debt actively competes with private enterprise for capital, exerts upward pressure on yields, and requires massive cash payouts to external creditors.”

WolfStreet points out the buyback is “swapping old cheap debt at a discount for new expensive debt.” The $14 billion Bessent will buy back is a tiny fraction of the amounts outstanding--$4.4 trillion in the 10-year and $5.5 trillion in the 20 and 30-years. So that’s $14 trillion in a market of almost $10 trillion, or 0.14%.

Moving on: The Fed minutes of the July meeting gave us nothing new. We already knew three members would prefer a hike. ING points out that the vote was taken before we got lousy jobs numbers, subpar retail sales and not-so-bad inflation. To get a hike, inflation in particular needs be alarming in order to convince the no-hikers. ING doesn’t see that coming and accordingly, sees rates on hold well into 2027.

Something else: Mr. Warsh wants 6 meetings per year instead of 8. The market won’t like that but it’s consistent with his wish to wean traders off the Fed. See below for more on taming the Fed’s balance sheet.

Yesterday brought a renewal of the “no landing” concept, meaning not a hard landing from turmoil in stocks and bonds. Yields will stay on an upward trendline but more slowly. Equites will surge again because the gains in tech already booked are just too enticing. But we continue to worry that both are the frog in the pot of water that has yet to boil. As Sorkin implies in the book 1929,  a crash is coming again. We just don’t know when, or exactly what will lead it. The book is a tremendous read.

Forecast

Today we get the usual weekly jobless claims and the Philly Fed. Neither should have much effect.

The Treasury purchases promised by Bessent are only a tiny fraction of the debt outstanding, so largely symbolic. But as in currency market interventions, the amount of money doesn’t have to be huge to send the message. It remains to be seen whether the bond vigilantes will take on the TreasSec.

It may be important that this buyback plan came out of the blue and had not been mentioned in the quarterly refunding‌plan from two weeks ago. The rise in yields to multi-year highs is the trigger, along with somebody yelling at Bessent to do something to stop the stock market slide. As Reuters notes, “​Buybacks don't change the amount of debt being raised but may shift the emphasis to raising more short-term funds - something analysts commonly refer to as ‘operation ​twist.’” The Treasury was already doing that. Nobody knows how much it can do before something breaks.

Market players do not approve of government interference in markets and yet usually cave to what the government wants. We will be watching for the next purchases, scheduled for Sept 9.

In the end, the buy-backs do not change the amount of US indebtedness and have nothing whatever to do with upcoming inflation data. The market has already decided the Fed will not hike in September but if and when yields go back up, do we get more meddling? Probably not because failure to get the desired effect in any longer-lasting way would be the end of Bessent. Then disapproval of meddling would be joined by the ineffectiveness of meddling and the dollar would be toast along with the dollar’s standing. Reserve diversification will go faster… But overall, this is a non-event that changes nothing.