Bessent’s Treasury Twist Makes November Refunding a Wall Street Wildcard

Treasury Secretary Scott Bessent's recent intervention to reduce long-term borrowing costs through expanded bond buybacks, a strategy he terms a "Treasury twist," is creating significant complications for the Federal Reserve's monetary policy, particularly its decisions on interest rates. This move, which started by doubling buybacks to $4 billion per operation, aims to hold down bond yields. However, if successful, it could inadvertently encourage borrowing during a period of already elevated inflation, potentially pressuring the Fed to hike interest rates further, according to Fed watchers.

Since Bessent's announcement, key market metrics indicate an immediate impact, with Treasuries outperforming equivalent-maturity swaps and the 30-year spread narrowing to its smallest since February. Benchmark US yields have also drifted lower, though their longer-term trajectory remains uncertain. The market response reflects a "Bessent put," where traders are reluctant to bet against a Treasury actively intervening, and a bullish tilt is evident in the options market for long-maturity Treasuries. Citi's head of US rates strategy, Jason Williams, noted that Bessent's actions, including yen intervention, suggest a readiness to achieve his goals.

The potential use of the Treasury General Account (TGA) to finance these increased purchases, which could involve drawing down $100 billion to $200 billion from the department's cash at the Federal Reserve, has further boosted market sentiment. However, despite these interventions, the 10-year US yield remains near 4.7% and the 30-year yield near 5.2%, close to their highest levels since early 2025 and 2007, respectively. Experts like Libby Cantrill of Pimco caution that while buybacks may technically decrease yields, the fundamental issue of structural US budget deficits, requiring significant Treasury supply, remains unaddressed. Investors surveyed by JPMorgan Chase & Co. on August 24 showed increased long and short positions, with neutral positions falling to 54%, the fewest since May 26.