Treasury's Market Intervention Sparks Concern About Fiscal Policy and Equity Valuations

Former New York Fed President Bill Dudley has criticized the US Treasury's recent market interventions, specifically the decision to ramp up buybacks of long-dated government debt. This move breaks from the department's traditional commitment to regular and predictable issuance, according to Dudley.

The Treasury had previously maintained steady quarterly refunding guidance as of early August, signaling no changes to auction sizes through 2027. However, it later doubled down on buybacks, with a goal of soaking up some of the supply weighing on the long end of the yield curve and easing the pressure on borrowing costs.

Dudley also pointed out that these fiscal maneuvers complicate life for the Federal Reserve, which is trying to calibrate monetary policy against a backdrop of persistent inflation and a labor market that refuses to cool in a straight line. When the Treasury intervenes to suppress yields, it effectively loosens financial conditions, making it harder for the Fed to assess whether monetary policy is actually restrictive enough.

Dudley also expressed concern about equity valuations, citing the Shiller CAPE ratio, which measures price-to-earnings over a 10-year inflation-adjusted period. The ratio sat near 41 as of August, significantly higher than its long-term average of roughly 17. He characterized the current environment as reflecting bubble-like conditions.

Dudley's comments come after the Treasury Secretary Scott Bessent announced plans to expand the long-bond buyback program to more than $4 billion, roughly double its previous size. The move aims to ease pressure on borrowing costs by soaking up some of the supply weighing on the long end of the yield curve.