Why Bessent Tried To Rescue The Bond Market (And Failed)

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**Ed Elson** (1:54)
Welcome to Prof G Markets. I'm Ed Elson. It is September 1st. Let's check in on yesterday's market vitals.
The major indices declined as the US and Iran exchanged fire for the first time in a month. Brent crude climbed. The yield on 10-year treasuries rose. And finally, Amazon shares fell nearly 3% as the FTC sued the company, claiming it overcharged advertisers.
Okay, what else is happening? Two men in Washington are pulling the bond markets in opposite directions. At the Federal Reserve's July press conference, Fed Chair Kevin Warsh said that he would keep withholding forward guidance. The 30-year jumped and kept climbing, eventually passing 5.3%, its highest level in nearly 20 years. Warsh had argued that investors should trade based on the economy, rather than the Fed's forecasts. The central bank, he said, is, quote, trying not to interfere with that market signal. But then, a couple of weeks ago, Treasury Secretary Scott Bessent did exactly that. He announced that the government would, quote, at least double the size of its debt buybacks, raising the cap per operation from $2 billion to more than $4 billion. The goal was to support liquidity and put downward pressure on long-term borrowing costs. That same day, the Treasury reported that the national debt had crossed $40 trillion for the first time ever. Yields initially fell before climbing back up. So, here to join us to discuss the bond markets, to discuss Bessent's intervention and what Federal Reserve Chair Kevin Walsh might think of all of this, we're speaking with our friend Robert Armstrong, US. Financial Commentator for the Financial Times and author of the Unhedged Newsletter. Robert, great to see you. Just so you know, we have been off on vacation for two weeks. So, we haven't been reading or covering any of this. We leave for two weeks and then suddenly, the bond markets have perhaps their most chaotic couple of weeks in recent memory.

**Robert Armstrong** (3:51)
I mean, you go away just for a little while and look what happens. So, thanks a lot, Ed.

**Ed Elson** (3:57)
So, we're going to need to back up a little bit and get your summary of what actually happened here from Bessent's intervention and then to Kevin Warsh giving what seems to be a little bit more of a hawkish stance in his Jackson Hole speech. What's going on with interest rates? What's going on in the debt markets as well?

**Robert Armstrong** (4:15)
Let's start with Bessent's intervention. I'm struggling to remember the exact date. But what he did was buy bonds, US Treasury bonds in a somewhat unusual way. There is a normal action that the Treasury takes called buybacks which is an effort to keep the Treasury market operating smoothly.
They do this because as Treasuries get older, as they sit in the market longer, they become harder to trade. It's like an old issue with a weird interest rate, and there's not that much of it around. So on a very regular basis, it's been normal for a couple of years for the Treasury to go into the market, buy the old ones and replace them with new ones. So taking out the stuff that's hard to trade and replacing it with brand new liquid stuff that trades easily. What Bessent did that is different, is he did it off schedule and then promised to do even more of it off schedule. So what is normally an operation that can be legitimately described as an effort to make the plumbing work better, or in kind of finances to improve liquidity looked very transparently to everyone in the world, like an effort to prop up the price of bonds by buying them. There was also some comments that perhaps in the future, the Treasury would use the Treasury's general account for these kinds of operations, which would be kind of new. The Treasury general account is the Treasury's checking account. Basically, it's where your tax dollars go and where the spending comes out of. That was like, whoa, he's going to use the general account. So it was an attempt to shock the market and get a stronger bid for bonds, and it didn't really work.