Editors at National Review Online offer words of caution to the Trump administration’s top treasury official.
A heavily indebted debtor is not well-advised to be seen to play games with his creditors, and that was what Treasury Secretary Scott Bessent was widely perceived to have done a couple weeks ago. Yields on 30-year Treasuries had been trending up for some time and had reached 5.33 percent, their highest level since 2001 (a number worth watching by mortgage borrowers too). And so the Treasury announced (choosing unusual timing given the refunding cycle) that it would be buying longer bonds with short-term maturities. This only had a brief effect on the 30-years. It took a second announcement doubling the size of the proposed buyback to make a somewhat more lasting dent, possibly helped by a slight easing of oil prices. The yield on the 30-years is around 5.19 now. Was the Treasury playing games in order to nudge long-term rates down a little?
Quite a few thought so, including, awkwardly, Stanley Druckenmiller, a billionaire investor who was once a mentor to Bessent. He dismissed the Treasury’s argument that this was nothing more than “liquidity management.” Rather, he argued, the Treasury was undertaking price management, something very different. As Friedrich Hayek argued years ago, monkeying around with prices rarely ends well.
Adding to suspicions that this might have been going on were the president’s well-known views on interest rates, doubtless sharpened by the upcoming midterms. Memories were also fresh of the Treasury’s intervention (using euros) in support of the ailing yen at the end of July. …
… The unfortunate reality is that so long as the U.S. keeps piling up more debt, there is only so much that clever maneuvers can do to ease the costs and vulnerabilities that go with it. Creditors won’t take any positive effect of the proposed buybacks on yields as an indication of better times to come and, worse still, may well regard them as a warning sign. Their effect won’t last for long and will be outweighed by inflation concerns, as, indeed, Fed Chairman Kevin Warsh is clearly signaling.
