Treasury Secretary's Latest Move Falls Flat Amid Fears of Rising Deficit
Washington is struggling to address its budget deficit, and the latest attempt by Treasury Secretary Scott Bessent has been met with skepticism. In a move to push long yields lower, Bessent doubled the ceiling on Treasury's long-bond buybacks to $4 billion per operation.
The market reacted quickly, with the 30-year yield falling after the announcement but rising back up by Thursday near 5.25%. Bessent said that if yields didn't fall in line, he would continue to expand the program, but critics argue that this won't make a significant impact on the market.
Moreover, the buyback program has its own set of problems. The $38 billion allocated for liquidity-support buybacks is a tiny fraction of the total marketable debt, and every long bond bought back gets refinanced with short-term bills, which are currently above the recommended range of 15-20%.
The situation is further complicated by the fact that the Treasury's own chairman, Kevin Warsh, is trying to get investors to focus on the data rather than the Fed's actions. However, Bessent seems to be pulling in the opposite direction, using the buyback program as a tool to defend a yield level.
The Congressional Budget Office has estimated that the fiscal 2026 deficit will reach $2.1 trillion, largely due to a court case that struck down the administration's tariffs and led to a significant drop in revenue. The Treasury is now refunding more in tariffs than it collects, and foreign holders are pricing in the uncertainty of US fiscal policy.
While some critics argue that this is not unusual by historical standards, others point out that the current situation is different from the past. Nominal 30-year yields above 5% look alarming against the artificially low years after 2008, and a currency and a long bond don't usually fall together while the deficit and interest bill climb.
With no medium-term consolidation plan in sight and healthcare, defense, and tax policy as contested as ever, it's clear that Washington is struggling to address its budget deficit. Bessent's techniques may provide temporary fixes, but they won't address the underlying structural revenue and spending gap.