Why Bessent Blinked | Luke Gromen on Doubling of Treasury Buyback Plan to Tame Long-End Yields

**Jack Farley** (0:00)
Today's episode is brought to you by the Teucrium Corn Fund, ticker CORN. Let's get into it. Got a very important conversation today. I'm joined once again by Luke Gromen of Forest for the Trees Research. Luke, welcome back to Monetary Matters.

**Luke Gromen** (0:14)
Thanks for having me back on, Jack. It's great to be here.

**Jack Farley** (0:17)
Luke, last time we spoke in December, you had a thesis that AI and the AI capex buildout would cause borrowing costs on the long end to rise. That was a pretty contrarian theory, but here we stand right now and the hyperscaler issuance for this year is probably going to be about 500 billion and the long end yields have risen a lot, about 50 basis points since we last spoke. The 30-year yield well over 5 percent and this rise in yields has caused market angst, and so much so that we actually had a news item from the Treasury Secretary today. I set the stage for you today.
Why have yields risen so much since we last spoke, and what is the bombshell that has hit markets very recently?

**Luke Gromen** (1:02)
Yeah. A lot of demand for capital has been driving it. You've got essentially AI bidding for capital, Secretary Bessent bidding for capital. The two of them are competing with each other. We're getting to the point, I don't think we're fully there yet, where it's a bit of a paradox because AI is bidding for capital and bidding up the cost of capital against a government who is dependent on receipts, half of the receipts from employment and AI in the short run, I think is going to hurt employment receipts. It has to for the AI case to make sense because that's what productivity is in the short run.
It was really two things. It was AI, three things, AI bigger than expected government deficits, especially after the tariff thing was knocked down by the Supreme Court, and then the stupid Iran war.
If I wanted to do the dumbest possible thing, as the Trump administration, I would have attacked Iran, and they did it. We were showing people at the time, the day we attacked Iran, the tenure was 3.94 percent. Went out yesterday before today's news at almost 4.74 percent. That makes perfect sense why rates went up. It was a very bad idea to do what they did. They thought it would be over fast. It wasn't. It isn't going to be. Then it brings us to today where Bessent came out and announced that he's doubling the size of Treasury buybacks, which it makes perfect sense. He needed to. People say, no, it looks like he panicked. They said he should be panicking. The latest third quarter Treasury Barring Advisory Committee report, we literally wrote a report for clients yesterday. The title was 3Q26 TBAC Report says that Bessent has an emerging market hard currency debt spiral problem today. And we underlined today. That was the morning of August 18th, August 19th. There we go. He's managing managing long rates via upsizing Treasury buybacks.

**Jack Farley** (3:03)
Treasury Secretary Bessent just did literally today, August 19th, raise the buyback level. So it's increasing by at least double the size of liquidity support of buyback operations for Treasury securities government bonds from the 10 year to the 30 year sector. The long end support.
So what is this program and how do you think it is going to work or not work?

**Luke Gromen** (3:26)
It's essentially a version of depending on how you want to spin it, operation twist, it's another soft form of yield curve control.
The full report we wrote for clients last week on August 11th, we highlighted that Bessent's yen interventions were a soft form of yield curve control. His admonishment to upsize the FEMA swap line so that Japan could use them, were a form of soft form yield curve control. We'd highlighted that for his 18-month tenure, that's all he's done is move down the path towards yield curve control. The title of that report was Secretary Bessent Accelerates Toward Yield Curve Control, Further Down the Road to Yield Curve Control. Whether it's the UAE swap lines, whether it's the Japan swap lines, whether it's the stable coin thing, whether it's treasury buybacks, which he's now upsized, it's all in the same direction, which is managing the long end by issuing more at the short end. That's fine. That's totally fine. That's essentially what he has to do. The trade-off to that is that it's going to be inflationary.

**Jack Farley** (4:38)
I think part of the reason yields have risen so much is Kevin Warsh has came in. When Kevin Warsh took over the Federal Reserve, there was a time where people thought he's so strong, he's so hawkish.