US Treasury Secretary Scott Bessent delivered a flurry of policy signals on Thursday, addressing topics ranging from the recent volatility in the US Treasury market to the ongoing situation with Iran.
With long-term US Treasury yields climbing once again, Bessent indicated that the Treasury's single-operation buyback size for long-dated debt could surpass $4 billion, emphasizing that the department possesses a robust toolkit to address market conditions.
On the Iran front, Bessent revealed plans to hold a press conference on Monday, August 24, to detail the administration's action plan against Tehran. He hinted that intensifying economic pressure could serve as a key alternative to resuming large-scale military operations, stating, "We have asymmetric information. I'm not sure why oil is the focus. If we apply maximum economic pressure, it means a large-scale military conflict is less likely."
Bessent also argued that current Treasury yields do not fully reflect US economic fundamentals, particularly noting the "very thin" liquidity in the 30-year bond. Regarding the dollar, he reaffirmed the administration's commitment to a strong dollar policy. On corporate financing, he observed that expectations around AI investment are making companies "almost insensitive" to yields when issuing debt, with such investment ultimately poised to drive productivity growth.
These remarks come just one day after the Treasury expanded its long-dated bond buyback program. On Wednesday, the department announced it would at least double the size of liquidity support repurchase operations for 10-to-20-year and 20-to-30-year maturities, raising the per-operation cap from $2 billion to at least $4 billion.
Long-End Yields Not Reflecting Fundamentals, 30-Year Liquidity Especially Thin
When asked whether the Treasury might intervene further in the bond market, Bessent offered a fairly unambiguous signal. He described the current market as a thinly traded segment, asserting that the Treasury has a powerful toolbox at its disposal.
He placed particular emphasis on the possibility that markets may not be fully appreciating US economic fundamentals, reiterating that yields are not reflecting them and that liquidity in the 30-year tenor is especially scarce. On the potential scale of buybacks, Bessent set no definitive ceiling, stating it would depend on conditions. He dismissed any intraday fluctuations as "noise" and framed the Treasury's objective as attempting to restore balance to a weakened market.
This suggests that Bessent is not signaling an end to intervention following the announced expansion, but rather explicitly preserving the option for further action. Market reports indicate he even suggested single-operation buybacks could exceed the previously announced $4 billion figure.
Bessent also expressed confidence that the US can grow its way out of its debt burden. In other words, while the Treasury uses market operations to ease long-term financing pressures, he continues to anchor the ultimate solution to America's debt challenges in economic growth and productivity gains.
Buyback Boost Fades Within a Day, 30-Year Yield Back to 5.26%
The backdrop to Bessent's latest intervention signals was the Treasury's sudden expansion of long-dated bond repurchases on Wednesday. According to the department's announcement, starting September 9, liquidity support repurchase operations for 10-to-20-year and 20-to-30-year nominal bonds will be at least doubled, with the per-operation cap raised from $2 billion to at least $4 billion. The move was framed as a measure to improve liquidity in the long-end market.
Following the news, Treasury yields initially fell noticeably, providing a brief boost to global bond markets. However, that relief proved short-lived. On Thursday, long-term yields climbed again, with the 30-year rising about 7 basis points to 5.26%, returning to pre-announcement levels. The 10-year yield also touched 4.71%. Reports suggest the relief from the buyback measures may be temporary, as markets remain focused on the massive fiscal deficit, inflation expectations, and long-dated supply pressures.
This underscores lingering doubts about how much the Treasury's action can meaningfully lower long-end funding costs. Strategists have noted that markets are not fully convinced Bessent can effectively pin down long-term yields, with multiple forces pushing yields higher and steepening the curve, including fiscal strains across major developed economies and sticky inflation.
While the buybacks can improve liquidity in some long-dated bonds, altering the fiscal and inflation pricing logic behind long-term yields is no easy feat.
Funding Long-Dated Buybacks with Short-Term Debt: A Fiscal QT?
Another key question surrounding the Treasury's repurchase operations is where the funding comes from. Wednesday's statement did not specify the source of financing for the expanded program. The Treasury typically relies on issuing short-term bills with maturities under one year to manage fluctuations in funding needs.
If the Treasury is effectively increasing short-term bill issuance to fund long-dated bond buybacks, the operation could resemble a fiscal version of "Operation Twist" – altering the maturity structure of the government bond market by increasing short-dated supply and reducing long-dated supply. Some market analysts have discussed this possibility, with some describing the shift as "QT is here."
However, this does not mean the Treasury is implementing quantitative easing in the traditional sense. Unlike the Federal Reserve, which can create bank reserves directly, the Treasury cannot conjure bills out of thin air to purchase long-dated bonds. If short-dated issuance funds the buybacks, investors ultimately need to absorb those bills.
Consequently, some market participants argue that the actual incremental demand for long-dated assets from this operation may be quite limited. Even with an expanded buyback program, relative to the vast stock and issuance of long-term US debt, the new demand remains very small and is unlikely to single-handedly alter the supply-demand dynamics of the long end. This is a key reason why yields were quickly pushed higher again on Thursday: the Treasury can influence market liquidity structure, but it cannot eliminate fiscal deficits, debt supply, and inflation risks through buybacks alone.
AI Investment Making Firms Less Yield-Sensitive, Bessent Bullish on Productivity
Beyond government debt, Bessent also addressed the rapidly expanding corporate bond issuance and the impact of AI investment on credit markets. He noted that because companies believe they will reap high returns from AI investments in the future, he has observed corporate bond issuance that is "almost insensitive" to yields.
He remarked that companies issuing long-term bonds is interesting, adding that if he were a corporate executive, he would focus more on the intermediate part of the yield curve, the so-called "belly." In his view, corporate investment will ultimately foster productivity growth, so much of the current financing behavior will not change markedly due to short-term yield fluctuations.
This assessment aligns with another pressure facing the bond market: AI infrastructure requires substantial capital expenditure, and technology companies and related supply-chain firms are continuously tapping the debt market, adding to credit supply. But Bessent is more focused on the long-term economic returns AI investment could generate. In his logic, if AI investment translates into genuine productivity gains and economic growth, then the relatively higher financing costs companies bear today could ultimately be covered by greater investment returns.
Bessent Reaffirms Strong Dollar Policy, Says Greenback Returning to Two-Month-Ago Levels
On the dollar, Bessent's signals were relatively clear. He stated that the dollar has been very stable and is returning to levels seen two months ago. He also reiterated that the US will maintain its strong dollar policy.
This stance comes after the Treasury expanded its long-dated bond buyback program. Markets had previously worried that direct Treasury intervention in the long-end could heighten investor concerns about policy interference and risks to dollar assets. Some investors even suggested the dollar could be a potential "victim" of this bond market intervention. But Bessent clearly aims to convey the opposite message: Treasury market operations do not signify a retreat from the strong dollar policy.
Trump Administration Shifts to Economic Pressure, Iran Press Conference Set for Monday
On Iran, Bessent delivered another significant policy signal. He announced a press conference for Monday to discuss US actions against Iran, stating that Washington will impose the "most severe" sanctions on Tehran. The day before, President Trump had already indicated the US would take the "toughest ever" economic actions against Iran. The administration is currently attempting to force Iranian concessions through heightened economic, financial, and trade pressure.
What is particularly noteworthy about Bessent's latest remarks is his suggestion that while economic pressure intensifies, the US may not necessarily need to relaunch large-scale military operations. "If we apply maximum economic pressure, it means a large-scale military conflict is less likely." In other words, the Trump administration's toolkit for pressuring Iran appears to be shifting further from military means toward economic and financial sanctions.
Analyses have pointed out that waging an "economic war" against Iran is not without challenges. Iran has long been under US sanctions and has developed a certain resilience to such pressure. Moreover, the Iran issue is closely tied to global energy supplies and the security of shipping through the Strait of Hormuz, meaning escalated sanctions could produce complex spillover effects. Bessent's announcement of further details on Monday also suggests markets may soon receive more information on the scope, targets, and implementation methods of the sanctions.
Bessent Puzzled by Sudden Oil Price Spike, Says US Actions Will Push Prices Down
Notably, at a time when the US is preparing to intensify economic pressure on Iran, Bessent expressed surprise at Thursday's rise in oil prices. "We saw oil prices surge today, and I don't quite understand it," he said. He added that the upcoming US economic actions will bring oil prices down "faster."
Oil prices have become a critical variable that US policymakers must contend with. Rising crude prices not only increase energy costs for American consumers and businesses but could also reignite inflation expectations, thereby pushing long-term Treasury yields higher. This directly intersects with Bessent's efforts to stabilize the long-dated bond market: if the Iran situation keeps energy supply risks elevated, rising oil prices and inflation expectations could offset some of the impact of the Treasury's buyback operations on the long end.
Thus, Bessent's dual emphasis – touting the Treasury's ample bond market "toolbox" while attempting to mitigate Iran-related energy risks through economic means – reflects a common policy logic: minimizing external shocks to America's long-term funding costs. For now, the market's initial response on Thursday, with the 30-year yield climbing back to 5.26%, offers a preliminary verdict: Treasury operations can swiftly shift short-term trading sentiment, but truly reversing long-term yield trends ultimately depends on broader fundamentals such as fiscal deficits, inflation, economic growth, energy prices, and the supply-demand balance of US debt.
Comments