The past week has featured two separate verbal interventions by the Treasury Department into the bond market to warn speculators around shorting the bond market to suppress yields at the long end of the maturity spectrum.
In our estimation this is an attempt to prevent yields from rising, which would impact rates on consumer credit cards, home loans and auto loans, as well as borrowing costs for businesses.
But the bond market remains unimpressed, and we have not observed a meaningful and sustained decline in interest rates.
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From our vantage point, for such interventions to work they need to be interpreted as credible.
For that to occur, there must be significant policy changes. These could include fiscal consolidation or an increase in taxes, a new tax revenue source—think value-added tax—accompanied by a meaningful slowing in spending or outright cuts on defense and social obligations.
Targeting fraud, waste and abuse is not going to get it done.
The U.S. budget deficit as a percentage of gross domestic product stands at an elevated 6% through July.
This is all happening at a time when the U.S. economy is expanding at nearly 2% a year, growth has averaged 3.4% over the past five years and unemployment sits at 4.1%, which is a good approximation that the economy is resting at or near full employment.
When an economy is experiencing growth and full employment, it calls for fiscal discipline, not reckless expansionary fiscal policy.
There is no orthodox or credible economic policy framework that suggests such a policy combination is either optimal, rational or prudent.
That all begs the question why the U.S. Treasury is signaling its willingness to use a portion of the $950 billion in the Treasury General Account to support the modest buyback program it intends to launch in early September and end just after election day in November.
With the 10-year Treasury trading near 4.7% and the 30-year at or near 5.2%, there is no clear emergency. There is no dysfunction in domestic capital markets or a lack of smooth functioning in money markets that would demand such rhetorical ambition.
My sense is that this is not a Draghi-like doing whatever it takes moment. Nor is it a Bernanke/Paulson bazooka. Those were open-ended credible commitments that, in the case of the latter, had the force of law and the support of Congress behind it.
We anticipate roughly $100 billion to $200 billion may be tapped to support Treasury buybacks. Any more would put at risk the U.S. Treasury rainy day fund in case of an actual crisis.
In short, where is the emergency?
Bond yields at these levels hardly constitute an emergency. In fact, one might argue they correctly reflect underlying economic fundamentals amid accommodative financial conditions.
While we acknowledge based on Treasury Secretary Scott Bessent’s Monday news conference that a major financial institution will be sanctioned this week over its dealings with Iran, absent a credible fiscal consolidation policy—not another DOGE redux—we do not see bond yields moving lower in a consequential manner.
Yield curve control requires Fed cooperation.
And we are not expecting Fed Chair Kevin Warsh, at his Jackson Hole speech this week or in any comments to the financial media to address any of this.
