Besant's Bond Market Gambit Falters Amid Debt and Inflation Pressures
US Treasury Secretary Scott Besant has made an attempt to reshape the world's largest bond market, which he had previously criticized. The move involves repurchasing a batch of long-term Treasury bonds while issuing more short-term securities, a strategy reminiscent of the Federal Reserve's 'Operation Twist' program from the 1960s.
The plan was announced last Thursday, and after it was revealed, long-term bond yields dropped sharply on Wednesday but quickly rebounded. The 10-year benchmark yield closed at 4.73%, close to its highest level since Besant took office.
Besant believes that current long-term yields have deviated from their 'equilibrium' level and are under pressure due to record-breaking debt levels, a surge in corporate bond issuance driven by the AI boom, an inflation rebound triggered by energy market turmoil, and unclear policy path of Federal Reserve Chair Kevin Walsh.
Market participants are skeptical about Besant's ability to control long-term yields, with some arguing that only US budget deficit reduction, a stock market correction, or a cooling of AI investments could drag down yields. Others believe that the Treasury Secretary's efforts will be ineffective and that the market has already improved significantly this year.