(Bloomberg) — After a turbulent stretch for the US bond market, traders are heading into the weekend with questions about what Treasury Secretary Scott Bessent’s next move will be.
Treasuries slipped Friday, led by the short end, after data showed business activity grew at its fastest pace in more than four years, backing the case for interest-rate hikes. The two-year yield was nearly five basis points higher at 4.23%, while the 10-year’s rose three basis points to 4.73%.
The discussion in the market currently revolves around what tools Bessent would reach for if yields start heading higher again and whether limits to the Treasury’s firepower mean the Federal Reserve might step in.
On Thursday, Bessent talked up the size of potential buybacks and hinted at more plans to address US borrowing costs, without providing clear details on the initiative. It’s done little to quell concern among investors about the US debt burden, and there is scant political appetite for any significant change.
“The ultimate problem with the Treasury’s intervention is that it costs money,” said Philip Marey, senior US strategist at Rabobank. “For now, the Treasury is funding this by shifting from longer-term debt to shorter-term debt. But with the total federal debt constrained by the debt ceiling, the Treasury will eventually run out of ammunition.”
The Treasury surprised traders this week with its plan to buy back more debt — touted as a move to improve liquidity of certain older securities, but widely viewed as a move to bring yields down. Long-dated yields plunged on Wednesday in response to the news, only to rebound the next day as skepticism crept back into the market.
“If the Treasury runs out of firepower and yields spike again, the Fed may feel compelled to step in and buy these bonds,” said Marey of Rabobank. “This scenario could render Kevin Warsh’s internal debate about balance sheet reduction entirely academic. Instead of exiting the fiscal space, the central bank would be pulled even deeper into it.”
One possible next step is an adjustment to long-dated issuance. Tweaks to the language in the recent quarterly debt-issuance policy statement spurred a flurry of speculation that officials might look at curtailing auctions of the longest-maturity debt and focus on lower-cost, short and intermediate tenors for any future issuance boost.
“If yields come under renewed pressure, the Treasury’s response will be more revealing,” said Western Asset Management portfolio manager Robert Abad. “Further increases in buybacks or changes to long-end issuance would provide stronger evidence that policymakers are responding not only to market functioning, but also to the level of yields.”
While buybacks send a signal, it’s not enough to reverse the direction of yields, said Gregoire Pesques, Amundi SA’s chief investment officer for global fixed income. The Fed may need to hike interest rates to shore up its inflation-fighting credentials, he added.
That echoes an argument made by Goldman Sachs Group Inc. strategists. For all the Treasury’s efforts, cooling inflation is the best way to lower bond yields, they said.
It’s a topic that Warsh will have to address in his keynote speech at the Kansas City Fed’s Jackson Hole Economic Policy Symposium next week. Swaps currently imply around a 40% chance of a rate hike at September’s meeting, with a move only fully priced around the end of the year.
–With assistance from Michael MacKenzie.
(Updates prices throughout.)
More stories like this are available on bloomberg.com
