Treasury's Bond-Buyback Plan Sparks Inflation Fears Ahead of Jackson Hole

US Treasury Secretary Scott Bessent has expanded the department's bond-buyback program to support the long-term Treasury market and reduce borrowing costs. This move appears to be at odds with the Federal Reserve's ongoing battle against inflation.

The $32 trillion bond market saw a 19-year peak in long-term borrowing costs, leading to pressure on Federal Reserve Chair Kevin Warsh ahead of his speech at the Kansas City Fed's economic conference in Jackson Hole, Wyoming. US inflation remains above its 2% target at 3.7%, and markets are looking for clarity from Warsh on the path of interest rates.

Greg Peters, co-chief investment officer at PGIM Credit, has criticized Bessent's strategy as 'self-limiting' and 'self-defeating'. He expressed doubts about what Warsh is supposed to do in this situation. Lisa Shalett, chief investment officer of Morgan Stanley Wealth Management, has also raised concerns about the unpredictable intervention in the bond market, suggesting it could be a sign of debt sustainability issues in Washington DC.

Leading economists have previously warned against Bessent's expanded bond buybacks. Wharton Professor Jeremy Siegel termed the yield curve manipulation the 'Bessent twist', while veteran strategist Ed Yardeni cautioned that the intervention could complicate the Federal Reserve's upcoming policy decisions.