Treasury Department's bond intervention seems to be working
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There is a hot debate over the wisdom of the Treasury Department's bond market intervention. In the meantime, market moves suggest Treasury's intended purpose — of reining in longer-term borrowing costs — is working.
The big picture: Long-term Treasury yields have stabilized since the government said a week ago that it would buy back longer-term securities by at least $4 billion at a time.
- Technical indicators in the bond market, specifically the gap between Treasury yields and swaps of equivalent duration, have narrowed, implying global investors are more willing to hold Treasuries.
By the numbers: The 30-year Treasury yield reached a 19-year high of 5.31% on Aug. 17. Since then, those yields have come down, to 5.19% Wednesday morning.
- The more widely traded — and economically consequential — 10-year Treasury note is now yielding 4.66%, down from 4.72% on Aug. 17.
Between the lines: Treasury Secretary Scott Bessent, a longtime hedge fund manager, believes that carefully crafted interventions can have outsized effects on the market by changing traders' behavior, persuading them that betting against the U.S. government would be hazardous.
- In the early innings, at least, he appears to be achieving his goal of making it riskier for investors to bet against long-term Treasuries.
What they're saying: "This new Treasury 'put' improves the asymmetry of owning the long end by providing a potential light backstop," Jason Williams, head of U.S. rates strategy at Citi, tells Bloomberg.
- Bessent's actions "all point to someone ready to do whatever it takes to achieve their goals," Williams said.
Yes, but: That doesn't settle the question of whether the policy is advisable in the medium term. Legendary investor (and Bessent mentor) Stan Druckenmiller argued this week that the underlying cause of higher rates is massive U.S. fiscal deficits, which won't be solved by tactical interventions.
- "You can't buy your way out of a solvency conversation with liquidity tools," he wrote in the Wall Street Journal. "You can only postpone the conversation and raise the eventual price."
