The dilemma of the US Treasury "interveners": Deficit, AI-driven bond issuance surge, and Walsh's stance tightening the squeeze; Besant's buyback plan struggles to shake the 4.7% yield

Odaily Financial News APP has learned that when U.S. Treasury Secretary Scott Besant first took office, he fiercely criticized his predecessor's attempts to "remake" the world's largest bond market. Now, however, he is making a similar attempt himself. Last Thursday, Besant announced that he would implement his so-called "Treasury twist operation"—by repurchasing a batch of long-term Treasury bonds (while issuing more short-term securities)—evoking memories of the Federal Reserve’s famous “Operation Twist” program from the 1960s. Besant believes current long-term yields have deviated from their “equilibrium” level.

The twist operation did “twist” U.S. Treasuries for a day—after the plan was announced, long-term yields plunged on Wednesday but then quickly rebounded. The 10-year benchmark yield, which Besant focuses on most, closed last week at 4.73%, close to its highest level since he took office.

All this suggests that the Treasury Secretary’s efforts to push down borrowing costs—especially with the midterm elections approaching in November—are facing upward pressures far beyond his control. These pressures include: the United States’ (and, as some indicators this week show, the entire developed world’s) record-breaking debt levels (U.S. national debt surpassed $40 trillion this week); a surge in corporate bond issuance driven by the AI boom; an inflation rebound triggered by energy market turmoil after Trump went to war with Iran; and additional uncertainties caused by Federal Reserve Chair Kevin Walsh’s unclear policy path.

“Any path that can durably lower long-term yields cannot avoid areas this government is unwilling to touch,” noted Satori Insights founder Matt King. He said that only U.S. budget deficit reduction, a stock market correction, or a cooling of AI investments could drag down long-term yields.

The Debate Over “Return to Normal”

Some market participants do not believe yields have “deviated”. “I think we’ve returned to normal interest rate levels, 4% to 5% is the normal range,” said Edward Yardeni—the creator of the term “bond vigilantes”—just an hour before Besant intervened. While the Treasury claims its intervention aims to support liquidity, JP Morgan’s rates strategy team noted in a Thursday report that “market functioning has already improved significantly this year.”

Besant’s vision for controlling the yield curve (i.e., influencing rates of various maturities) now extends beyond Treasuries to the so-called “ultra-large corporations”—those aggressively borrowing to invest in AI. Earlier this month, Alphabet Inc. issued bonds with maturities as long as forty years. The Treasury Secretary stated this week that these investments would eventually yield faster and non-inflationary economic growth, but “are now causing short-term capital competition.” He suggested that if he were a CFO, he would “consider issuing more intermediate-term bonds”—meaning 5-year maturities.

This clear intention to intervene has even prompted market discussions of a “Besant put”—an echo of the old Greenspan put. ING Groep NV’s Global Head of Markets Chris Turner also used this term this week, though many doubt Besant really has the power to drive yields. The Treasury did not respond to requests for comment on Besant’s bond market interventions.

“Misinformation” and the Deficit Dilemma

In the face of rising yields, Besant said investors are being guided by “misinformation,” while he himself enjoys an “asymmetric” information advantage. “There’s a lot of misinformation regarding the deficit,” he said, and promised to re-focus the market on what he calls the Trump fiscal consolidation plan.

Strategist Alyce Andres commented: “Besant can’t control inflation expectations nor forcibly suppress nominal long-term rates, so he chooses to reduce supply of the less liquid, long-dated securities through buybacks. But the new plan needs investors to believe buybacks are a bridge toward a better debt trajectory—not just suppressing yields without fixing the deficit.”

Besant said in the coming days he will work with White House budget director Russ Vought to “look for measures on both the revenue and spending sides,” and hinted at cracking down on fraud and cutting transfers to state governments. The “Department of Government Efficiency” led by Musk attempted similar actions last year but fell short of its cost-cutting targets.

“We are skeptical of the government’s ability to take substantive action on the deficit at this stage,” wrote Evercore ISI Chief Strategist Sarah Bianchi in a research note. Besides interest payments from the Treasury (which now exceed $1 trillion annually), Social Security, Medicare, and Medicaid spending are the main drivers of this year’s fiscal deficit (predicted to be about 6% of GDP). Bianchi noted that reforming these benefits is “impossible in the short term”—and even less likely if Democrats win at least one chamber in Congress after the midterm elections.

Besant vs. Walsh?

What really falls within Besant’s authority is adjusting debt issuance and buyback strategies. Before this week’s action, the Treasury had two weeks earlier adjusted its broader issuance guidance; analysts say this opens the door to possible reductions in the supply of the longest (and highest-yielding) maturities. Such measures are reminiscent of strategies from the Yellen era—previously criticized by Besant—and suggest implicit differences between him and Walsh.

Walsh not only rejected the idea that yields have deviated from equilibrium, but has nearly endorsed the uptrend. On July 29, he said that even as the Federal Reserve hasn’t tightened policy in the face of high inflation, “the market has done much of the work,” and “market prices will continue to react as they see fit in direction and magnitude.” Walsh himself is about to have a key communication moment—he will deliver a speech Friday at the Kansas City Fed-hosted Jackson Hole annual meeting.

Investors will be watching whether he uses the occasion to repair his credibility after a poorly received press conference last month. At that time, Walsh failed to give a reasonable explanation for keeping rates unchanged, dodged any suggestion of possible rate hikes in the coming months, and said the Fed’s inflation target might be adjusted in January.

“We think Besant’s actions have put Walsh in something of an awkward position,” said Mark Dowding, Chief Investment Officer for Fixed Income at RBC BlueBay Asset Management.

“Reverse Playbook” to Come?

“For Walsh to truly reverse the playbook, he needs to clarify how they’ll provide quantitative indicators, how they’ll use information, and give a plan for the next three to six months,” said George Goncalves, Head of U.S. Macro Strategy at MUFG Americas. “At least the market needs to know what to focus on.” Walsh hopes to reshape the Federal Reserve’s balance sheet (which currently holds about $4.54 trillion in Treasuries) and has mentioned a new “Fed-Treasury Accord,” but did not elaborate.

The 1951 original Accord sharply limited the Fed’s influence on the bond market and ended yield curve control. If today’s U.S. policymakers truly want to push down borrowing costs, perhaps they’ll need to do the reverse. “Buybacks are more about sending a signal than substantive impact,” even if scaled up, they are unlikely to change the market structure, said Rebecca Patterson, former JP Morgan and Bridgewater executive and now Senior Fellow at the Council on Foreign Relations. “The more effective and sustainable policy path is quantitative easing by the Fed.”

Before taking office, Besant had referred to ongoing quantitative easing (i.e., Fed bond purchases) as a “permanent medication plan”; while Walsh, as a Fed governor in the early 2010s, opposed QE and has remained one of its harshest critics. Unless the two make such a major policy reversal, the yield curve will remain in investors’ hands. “The economy is resilient and global capital competition is intensifying,” said Priya Misra, Portfolio Manager at JP Morgan Asset Management. “Higher interest rates are logical.”