Are US Treasury Yields Out of Control? Bessent's Continuous Moves Signal 'Rescue for the Bond Market'

In response to the soaring long-term US Treasury yields and rising financing costs, Scott Bessent has been active recently. His support for yen intervention, adjustments to bond issuance statements, and backing for Kevin Warsh are all seen as signals from the Treasury to alleviate pressure on the bond market.

A series of actions by US Treasury Secretary Scott Bessent has drawn attention on Wall Street. Traders and strategists believe these measures indicate that the Treasury is attempting to ease the pressure brought about by the sustained rise in long-term US Treasury yields and is signaling its concern for the stability of the bond market.

Over the past week, long-term US Treasury yields have risen to a 19-year high, pushing up borrowing costs across the board, including for mortgages and corporate financing. Bessent subsequently took several measures that the market interpreted as attempts to curb further increases in yields.

One significant action was the US's first currency market intervention since 1998 to support the yen. Market participants believe this move is not only aimed at helping Japan stabilize its currency but also reduces the risk of Japan selling US Treasuries to raise dollars for currency intervention.

At the same time, Bessent mentioned that Japan could utilize a liquidity tool provided by the Federal Reserve in the future to alleviate the pressure of selling US Treasuries to obtain dollars.

Subsequently, when the US Treasury announced its quarterly bond issuance plan last week, it made slight adjustments to future Treasury issuance arrangements. The market believes this change may indicate that the Treasury is leaving room for a reduction in the supply of long-term Treasuries in the future.

Additionally, Bessent defended the new communication strategy of Federal Reserve Chairman Kevin Warsh through television interviews and social media. Warsh failed to clearly outline how and when the Fed would take action to control inflation after last month's policy meeting, leading to a sell-off in the bond market and pushing yields higher.

Priya Misra, a portfolio manager at JPMorgan Asset Management, stated, "The Fed and the Treasury must be concerned about the level of long-term rates. The intervention in Japan, support for Warsh, and the potential reduction in long-term bond supply can all be seen as the Treasury trying to signal that they are aware of the trends in the rate market and are not hesitant to use the various tools at their disposal."

Bessent's Tools Are Limited, Inflation and Deficits Remain Core Pressures on the Bond Market

Despite the Treasury's recent flurry of actions, market participants believe that Bessent's ability to influence long-term rates remains limited.

US Treasury yields have previously been driven by multiple factors, including persistently high inflation above target levels, an annual fiscal deficit nearing $2 trillion, and supply pressures from the continuous issuance of new debt by the government.

Last Friday, data released by the US Department of Labor showed a significant weakening in the job market, which led to a decline in US Treasury yields. The market believes that if the subsequent Consumer Price Index (CPI) is lower than expected, it could further reinforce the downward trend in yields.

However, the recent actions by the Treasury are still seen as an important signal that the government is willing to take measures within its authority to lower financing costs, which is also a long-emphasized policy goal of President Trump.

Shortly after Trump returned to the White House at the beginning of last year, Bessent stated that one of the government's key objectives was to lower the 10-year US Treasury yield, as this rate is a crucial benchmark for mortgages and other loans. Bessent indicated at the time that the government would push for lower yields through spending cuts and alleviating inflation.

In November last year, this former hedge fund manager referred to himself as the "nation's chief bond salesman" when discussing the responsibilities of the Treasury Secretary, stating that US Treasury yields are a "powerful barometer of success."

However, the reality has not fully developed in this direction.

The effects of government spending cuts have been limited, while tax cuts are expected to significantly increase the US government's debt over the next decade. Meanwhile, Trump continues to criticize the Federal Reserve and last week threatened to fire Fed Governor Lisa Cook again, raising concerns about the independence of the central bank.

Additionally, the war in Iran has led to rising oil prices, adding new pressure to US inflation and pushing the 10-year US Treasury yield to about 4.65%, higher than the levels at the beginning of Trump's second term.

John Velis, a macro strategist at BNY Mellon, stated, "Given the current spending policies and the state of war, it will be difficult to alleviate the pressure on long-term rates."

Yen Intervention, Adjusting Issuance Plans, Treasury Attempts to Stabilize Bond Market Expectations

Bessent's push to support the yen ostensibly aims to help a US ally stabilize its currency market, but investors believe its potential effects also relate to the US Treasury market.

Japanese bond yields have recently risen, exacerbating the pressure on Japanese investors to sell US Treasuries. At the same time, if Japan needs to sell dollar assets to support the yen, it may further increase the selling pressure on US Treasuries.

Furthermore, Bessent supports expanding the Federal Reserve's Foreign and International Monetary Authorities Repo Facility (FIMA repo facility). This tool allows foreign central banks to borrow dollars from the Fed using US Treasuries they hold as collateral, thereby reducing their need to directly sell US Treasuries for liquidity.

Peter Boockvar, Chief Investment Officer at Onepoint Bfg, stated, "As long-term rates rise, the US Treasury market has clearly reached a fragile state where we are encouraging foreign holders not to sell."

A few days after the currency market intervention, the US Treasury released its quarterly refinancing statement, adjusting the direction of future bond issuance.

Previously, the Treasury had indicated it would continue to assess whether to "increase" the issuance of coupon bonds and floating rate notes, but the latest statement changed to consider possible "changes."

Bond investors viewed this adjustment as a signal that the Treasury might reduce the issuance of long-term bonds.

A survey by Montreal Bank Capital Markets showed that about 61% of clients expect the next change in the auction size of 30-year US Treasuries to be a reduction rather than an increase. However, market participants pointed out that even if long-term bond supply is indeed reduced in the future, its impact may be limited.

What investors are truly concerned about is whether inflation will return to a controllable range. Over the past five years, US inflation has consistently exceeded the Fed's 2% target, undermining market confidence in long-term bonds.

Warsh's comments after last month's policy meeting triggered volatility in the bond market, with some investors questioning whether his anti-inflation stance was sufficiently clear.

After the adjustment in the bond market, Bessent publicly defended Warsh.

In an interview with CNBC last week, Bessent stated that the market needs to undergo a "detox" of the Fed's previous comments and expressed confidence that the Fed "will strike a balance between its growth mission and inflation mission."

Phoebe White, head of US interest rate strategy at UBS Group, believes that the Treasury's recent actions may have limited direct impact on long-term yields.

However, she stated that these measures at least indicate that "as long as the Treasury has any way to prevent long-term yields from rising, it will utilize the tools at its disposal."