Treasury Secretary Scott Bessent's recent intervention to boost liquidity in the government debt market by at least doubling its typical $2 billion debt buyback has not calmed investors as intended. Instead, investors have begun pricing in higher inflation rates, with breakeven rates hitting levels not seen in over two months. For instance, the 10-year breakeven rate rose to 2.34% on Thursday, its highest since June 10, and five-year breakevens reached the same level, the highest since June 16. This suggests growing concerns over the inflationary impacts of the Treasury's move, despite Bessent's insistence it wasn't an attempt to tamp down yields. Thierry Wizman, Macquarie Group's global foreign exchange and rates strategist, noted that the 10-year breakeven rose by about 6-7 bps, indicating the announcement was perceived as "inflationary."
The intervention initially caused long-dated Treasury yields to plunge, but they quickly rebounded. On Thursday, the 10-year benchmark stood at 4.73%, up 3.4 basis points and higher than pre-announcement levels, while the 30-year yield climbed 3.6 basis points to 5.27%. This reversal indicates the intervention failed to soothe investor jitters. Eoin Walsh, a portfolio manager at TwentyFour Asset Management, described the intervention as a "sticking plaster" that couldn't succeed in isolation. The dollar also weakened, continuing a trend that saw the greenback lose nearly 0.9% this week, potentially due to expectations of looser Fed policies.
Analysts largely criticized Bessent's strategy, with many referring to it as a "band-aid on a bullet hole." They argue the $4 billion buyback is "minuscule" compared to the scale of the U.S.'s $40 trillion national debt and annual deficits of roughly $2 trillion, which currently represent 6% of GDP. Joe Brusuelas, chief economist at RSM US, stated that without fiscal consolidation through higher taxes or reduced spending, the buybacks would be only temporary. Critics suggest the unscheduled announcement lacked a strategic plan and risked being counter-productive by reducing appetite for U.S. assets or the U.S. dollar. Van Hesser, chief strategist at KBRA, noted that the current yield levels of 4% to 5% for the 10-year Treasury are more in line with historical norms for a thriving economy, suggesting a healthy moderation of capital flows.
