Bessent Caught in Yellen-Like Liquidity Trap

Arthur Hayes, a well-known commentator, claims that Scott Bessent is repeating Janet Yellen's mistakes by prioritizing Treasury liquidity. This has led to increased demand for short-term dollar-denominated instruments and higher yields on long-term Treasuries.

In late 2023, Yellen sold more Treasury bills and fewer longer bonds, which decreased the Fed's Reverse Repo Program (RRP) holdings from $2.5 trillion to around $100 billion by January 20, 2025. This drop in RRP holdings is seen as an increase in liquidity released into markets.

Arthur Hayes points out that this has led to a rise in Bitcoin and the Nasdaq 100, while the 10-year yield backed away from 5%. He believes that both Yellen and Bessent want financing costs below 5%, which is a crucial level for mortgage rates, corporate bonds, and consumer credit.

Bessent has increased buybacks by $20 billion, but Arthur Hayes argues that this is a small amount compared to the roughly $40 trillion of federal debt. He also notes that Bessent's efforts have had limited impact on yields so far.