U.S. Treasury Secretary Bessent said last Thursday that he would implement a “bond adjustment” policy by buying large amounts of long-term U.S. Treasury bonds—requiring the sale of more short-term securities.
This echoes the Federal Reserve’s famous bond yield adjustment program from the 1960s. Bessent noted that current yields have deviated from their “equilibrium” levels.
Treasury prices did indeed fluctuate—but only for a day. After the announcement, long-term Treasury yields plunged sharply on Wednesday. However, they quickly rebounded. The 10-year benchmark Treasury yield, favored by Bessent, closed this week at 4.73%, near its highest level since his appointment.
All of this suggests that the Treasury Secretary’s efforts to lower borrowing costs—especially as November’s midterm elections approach—are being undermined by factors beyond his control, which are pushing up borrowing costs.
These include not only the U.S.’s record-high debt levels (a key metric surpassed $40 trillion this week), but also widespread debt issues across developed economies. Additionally, corporate bond issuance has surged amid the artificial intelligence boom. Inflation has risen sharply since President Trump’s war against Iran disrupted energy markets, and Federal Reserve Chair Kevin Warsh’s strategy has further heightened investor concerns.
Mark Dowding, Chief Investment Officer for Fixed Income at RBC BlueBay Asset Management, believes Bessent’s actions have put Fed Chair Warsh in a difficult position.
Warsh is about to face his own crucial moment of communication, delivering remarks at the Kansas City Federal Reserve’s Jackson Hole annual symposium on Friday.
Investors will closely watch whether Warsh attempts to restore credibility after his disappointing press conference last month, when he failed to clearly explain why interest rates would remain unchanged, avoided discussing any possibility of future rate hikes, and hinted that the Fed’s inflation target might be adjusted in January.
“If Warsh could truly clarify how they will provide signals, how they plan to use that information, and what their action plan will be over the next three to six months, he could turn things around,” said George Goncalves, head of U.S. macro strategy at MUFG. “At the very least, the market should know what to watch for.”
