Treasury Whiplash Leaves Traders Guessing Scott Bessent's Next Move

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2:18with Carol Masser and Tim Stenevek on Bloomberg Radio.

2:23Carol Massar:Let's get to what has been the week of whiplash when it comes to U.S. treasuries and really a focus on rates to around the globe. We've got a great roundtable. Ira Jersey, Bloomberg Intelligence, Chief U.S. Interest Rate Strategist, and Sarah Hunt, Chief Market Strategist at Alpine Saxon Woods, both here in studio. Traders are increasingly questioning what Treasury Secretary's next move will be after what's been, I think it's safe to say, a bit of a turbulent market, bond market, this past week. Sarah, how do you see it? I think that it was a surprise that he came out and said, this is what we're going to do in the long end of the curve.

3:00I think everyone's been looking at Warsh, Chairman Warsh, and looking at the Fed and seeing what's going to happen with interest rates there. I don't think that people were expecting the Treasury Secretary to come out and make his own news on this particular front. And I think there are, as you can see, quite a lot of questions about, one, one, how this is actually going to work mechanically, two, whether or not this is going to actually help the long end of the curve, which was arguably the idea because you've round-tripped that already. Because it did and didn't. It did and it didn't. And on the other hand, gold is just like, okay, we're gone.

3:27And it just is going again today. And I think that that's, you know, whether or not the only signal that gold gives is that we don't like anybody else's decisions or it's just a way to play a different angle, I think that you're seeing that reverse in interest rates didn't reverse gold. So that may be an anticipation of further movement.

3:44Carol Massar:Gold up 5 % this week. So yeah, we've seen a big move. I mean, Ira, where do you stand on this? Now that this is Friday, it's been a couple days. Yields are still moving up. Yeah, well, yields are kind of flattish, right? From the beginning of the week. So yeah, it did a whole lot of nothing. You know, devil is in the details here a little bit. So, you know, we won't find out the exact size. You know, he says maybe next week that they'll tell us more information. I did think it was really funny when Scott Besson said, you know, we're doing this because there's, you know, low liquidity in the middle of summer and things like that.

4:14But this doesn't start until September 9th. So I'm not exactly sure. That's technically the summer, right? I guess, but it's not August. It's not now. And in fairness, I was looking at the depth of the market, actually, right around the time that he said that. And actually, the depth of the market was not bad. The depth of the market was your typical summer-ish levels, not insanely low. So it's not like they really needed the direct liquidity support here.

4:39Carol Massar:I was going to say, political? Or did the market need this, Sarah? So it's interesting. I think that people have been concerned globally about rates rising, especially on the long end. And that's been a problem for investors. It's been a problem for all these companies that are now trying to finance the entire AI buildout. So the question is, are we doing something because this exact amount of money is going to make a change? Or is the fact that we're saying we're going to do something reminding everyone that the government can come in at any time and change the game? And I think it's a little bit to me of that.

5:08I don't know how you feel about that, Ira. But that was my take was a little bit like we're going to do something and not just stand there and let the market figure it out. Yeah, I think they did this and it was kind of underwhelming. Right. It's kind of like the Federal Reserve in December of 2007 when they did a, you know, they did a$40 billion program for a$300 billion problem. And, you know, so something like that. Maybe there will be a little bit more shock and awe. But there are risks to what they're doing, too. Right. Like if they're going to issue a whole lot of T-bills in order to buy back a lot of debt.

5:37And let's call this what it is. If it's going to work and if the president and Treasury secretary are really serious about getting long-end yields down, they have to do this in size. And we have to then call this an operation twist, similar to what the Treasury Department did in the 1960s. And if they do that, the one big risk for them is what happens if the Federal Reserve has to raise interest rates? because they're going to be issuing T-bills, which capture that interest rate move almost immediately compared to 30-year debt, which obviously takes 30 years to recapture that new interest rate environment.

6:10Sarah, what do you think it means for the Fed? Does this at all kind of alter when we do get a move from the Fed? I'm not sure what the answer to that is, and I don't know if there's any actual coordination going on that we don't know about. I mean, what we see is what the headlines are. We don't see what everybody's talking about behind the closed doors. So whether or not there is a conversation, I couldn't tell you. One would hope that there might be some sort of coordination or at least an understanding, because otherwise then you start to look like you've got government departments fighting one another.

6:40So what's your take on that? Well, I think that they're not coordinating, because if they were coordinating, then the Federal Reserve would not have stopped buying T-bills. The Federal Reserve was doing these reserve management purchases, buying$10 billion of T-bills every single month. So if they were coordinating and Treasury Secretary Besant said to Kevin Warsh, hey, we're going to be issuing more T-bills to buy 30-year debt. How about you buy some of those T-bills? Well, the Fed's not buying those T-bills. So if there was coordination, it was pretty poor.

7:07Carol Massar:Is this President Trump potentially too saying, hey, Scott Besant, I need you to do something because my Fed chair isn't doing something? Is it possibly? Absolutely possible, right? Because, again, I think we're all trying to understand, struggling to understand exactly what the point is in the timing frames. So fast forward. Okay. So do we get answers at Jackson Hole this coming week? I mean, we have a Fed chair who has already shown he doesn't like to say a lot or lay out the metrics of what metrics he is following and the Fed is following, the FOMC, in terms of figuring out monetary policy.

7:40Carol Massar:Do you think we're going to get anything this week? More specificity? He's told us he's going to frame the big questions. You can lay them out, but if you don't say what you're following, right? And this is the challenge that Kevin Worsh really has had. And I don't think he's done a particularly good job in communicating with the markets because you have to give the markets something, right? You can't give them nothing. And he's basically given the markets nothing. So he has to either say, give some kind of forward guidance or say, if this happens, then we will react this way. So give a reaction function.

8:08You have to do one of those two things. It's interesting because he put Mervyn King, former Bank of England governor, on the communications task force. This is what Murphy King wants to do. He says that, hey, we want to give the reaction function. We don't want to give forward guidance. But Kevin Warsh clearly has, if he read that paper, then he's not following it for sure. Well, and I also think that you're at the point now where you have to really look at that speech. If it was going to be under a microscope, now it's under five, right? Because now you went from, this is, we're all -

8:38Carol Massar:Every LLM is going to get that speech and we're going to get analysis. And everybody was focused on the Fed, and then they turned to the Treasury. So now they're extra focused on what they're going to say. And the fact that the communication has been, I would say, uneven is a word that you could use, doesn't help the situation. And I think that it makes it more important to clarify whatever. So I think Jackson Hole is, you know, we're all going to be sitting around on Friday watching what's going on. And we'll probably fall asleep because it won't be very interesting. But we're going to have to watch anyway.

9:06Well, we're going to be waiting for the walk, right? We're going to be waiting for all the central bankers.

9:10Carol Massar:Listen, Tom, Mike, and Lisa are going to be there. It's going to be interesting. Sarah, layer on top of this, and we've already talked with Ira about this, about the data center build-out. And you write in your notes, the pushback against data center build-out could be a blessing in disguise as well as investor concern over CapEx spending has been growing as the hyperscalers commit ever more equity and debt to the build-out. We've been talking about how the hyperscalers and everybody AI-related tapping credit markets and what that's done to maybe crowding out the treasury trade. What's top, like, what are, how worried are you about all of this tapping of the credit market for these AI guys?

9:44I think that there was definitely concern about how much money was being raised, how fast. And at the same time, you've got the government racing in to raise money. I mean, everyone's raising money, right? So that was an issue. Whether or not this money is actually going to have a return on investment is another question that people have been going crazy about. The idea that it's an arms race that you have to spend faster than China. The fact that there may be a bottleneck could be a blessing in disguise. just in the fact that people are worried so much about that spend and how much of that spend is coming out of debt and equity and no longer cash flow.

10:12And if that slows down, maybe that gives investors some room. Whether or not that becomes a further race to the top between China. I mean, I'm not sure how to look at that CapEx relative to other things. And I think that investors are struggling with that. Hey, join the crowd.

10:26Carol Massar:I don't know how to look at it either. Like, I feel like increasingly we say this, we see the headlines, we see the spend, and we're trying to put it in context. I also want to ask you about where equities go from here, especially if rates stay high. Because, like, we haven't really seen, I mean, even this week, like, it hasn't been a carnage in the S &P 500. But the 30-year yield is, you know, it's at these highs. Like, does this continue or is there really going to be some movement? Well, I sort of think that this is where Treasury came in and did something to the long end because that was starting to get investors worried.

10:59And you were seeing the S &P start to degrade. and the indices and other stocks underneath it as well, it's really going to be, it's a combination of it's going to be about earnings. And somebody made the point this morning, and I can't remember who it was. They were saying, yeah, earnings are great, but people are outspending those earnings. And that's a really good point because as we get into 2027, are we going to continue to up the ante on spend? And are the earnings going to follow? And I think that that's really, earnings is the biggest problem or benefit to the S &P. And right now that's all been working in everybody's favor.

11:31If that starts to trip and that second derivative starts to go, it doesn't even have to go down. It just has to grow less fast. And that becomes an issue unto itself, given where valuations are. Can we just keep going? This is really great. Come back next Friday? Sure. I'll be in Princeton. You'll be on vacation. I'll be on vacation. All right.

11:47Carol Massar:All right. Maybe a couple of weeks from now. Ira Jersey, thank you so much. Bloomberg Intelligence, Chief U.S. Interest Rate Strategist, and Sarah Hunt, Chief Market Strategist at Alpine Saxon Woods. Stay with us. More from Bloomberg Businessweek Daily coming up after this.

12:03Carol Massar:Some people treat ChatGPT like some kind of smart search engine, and some use it to get work done. ChatGPT Work is a new way of working in ChatGPT that can take action across your apps and files, stay with a project for hours if needed, and turn a goal into finished work. It's designed to help you move from a chaotic starting point to a reviewable first version. So all the source materials, briefs, and scattered information that you have to grind through to turn into something useful can just become something useful. Put ChatGPT to work on your most ambitious ideas and projects. Get started at ChatGPT.com by selecting Work Mode, available on Plus and Pro plans.

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13:53Catch us live weekday afternoons from 2 to 5 Eastern. Listen on Apple CarPlay and Android Auto with the Bloomberg Business app.

14:01Carol Massar:Or watch us live on YouTube. There's a story that is definitely of great interest to the Bloomberg community, the market community, right? Yeah, it's all about the probe into the business of Guggenheim co-founder and CEO Mark Walter. Of course, he just sold off the L.A. Lakers and reports talks about other possible asset sales. And it's all about the insurance companies of Guggenheim. I feel like we keep learning more and more about the story, but it's wild. We did have a team of reporters finding out exclusively that the investigation into his businesses, his insurance business, has also led to the Department of Justice to a small but prolific credit rater.

14:38Carol Massar:So let's get to it. Here with the team's reporting and then one of the journalists on the story is Ava Benny Morrison. She's Bloomberg News senior legal reporter. She joins us here in New York City. Ava, thank you, thank you for coming on. We've been talking about this story a lot. Start with the investigation. Why is the Justice Department seeking records from Egan Jones? What do we need to understand about how this investigation continues to evolve and why they are all of a sudden this small, little-known maybe firm, but as we know a prolific credit rater is all of a sudden now a target or at least of interest for the DOJ?

15:15So a key part of this investigation is looking at how some of the insurance companies linked to Mark Walter made loans to affiliated parties. Originally, these transactions were marked as unaffiliated, but it's since turned out that the insurance businesses have had to restate$20 billion or so worth of these assets. And along with that, many of the assets have investment grade ratings from this credit rater called Egan Jones. So, what we've learned over the past few days in our reporting is that the DOJ is requesting information from Egan Jones about these ratings. So, they've asked for material related to Delaware Life and Clear Spring as well.

16:00This doesn't suggest that by any means that Egan Jones is a target, but sort of shows the wide net that prosecutors are casting to try and figure out how billions of dollars worth of loans from these insurers ended up being funneled out to affiliated parties. What does it signal when an insurance company is using a credit rating firm like Egan Jones? I mean, look, I mean, they're approved, they're able to give credit ratings. So it's not necessarily, you know, bad, but what can we learn about, you know, the fact that this company was working with this particular rating agency? Look, I think, you know, these insurance businesses were big clients for Egan Jones.

16:52I think from what we can gather, at least a fifth of the assets related to Mark Walters' insurance companies relied on Egan Jones ratings. So, I think it shows, you know, despite Egan Jones being a relatively small firm, it does play a really outsized role in rating a lot of the assets in the insurance industry, particularly at a time where Wall Street has really seized upon using policyholder funds for other investments. Right.

17:26Carol Massar:And as you guys remind us, an investment grade rating from a firm like Egan Jones can help lower the amount of capital that insurers must hold in case the assets sour. So allowing them to run essentially their businesses more efficiently. It's just kind of a good understanding. You know, Ava, we were talking about this after this story broke, and it's just this idea we saw during the mortgage meltdown and the 2008 crisis, that kind of somewhat cozy relationship, right, between ratings agencies and the companies that need those ratings. I'm not saying anything is untoward, but what are we hearing from the company, from the U.S.

18:08Carol Massar:Attorney's Office in Manhattan, from TWG Global? Like, what are they all saying about this? Look, I can definitely speak to the U.S. Attorney's Office in Manhattan because that is a key part of my beat. And, you know, we've heard from leadership over the past 12 months that they are very interested in what is happening in private credit. It's going up. It's going down. They're looking at how it's grown so quickly, whether marks are being applied correctly, and how the role of these third-party firms, what role they kind of play in assuring investors that this stuff that they're investing in is, in fact, investment-grade.

18:49And ratings agencies are one particular area that prosecutors have been very much interested in. Okay, so you're following this story. There's a lot of layers to this, you know, this kind of saga here. What is top of mind for you? What are you watching next as you continue to kind of report this out? Yeah, absolutely. So, I'm keeping a keen eye on how this all ends for Mark Walter. We've seen that he has started selling down some of his assets. So, for example, selling his stake in the Lakers recently, or agreeing to it at least. and, you know, seeing whether the, by the insurance companies saying that they're going to restate a lot of these transactions and some of these loans are going to be paid down, whether that's enough for regulators and for the DOJ to be satisfied with that as an outcome, or if the investigation continues at full throttle and we say, we see some kind of penalty for some of the players involved here.

19:56Carol Massar:How long might it take to get some kind of resolution about what's the next step forward here, especially on a legal basis, just quickly. Yeah, look, financial crime cases, investigations can take a very long time. We know this one has been going since at least the fall last year. So it's anyone's guess, really. It could take months, it could take weeks. We'll just have to watch and see. Yeah, it's very interesting. We know it's certainly something that's always top of mind for folks here on Wall Street and certainly those who read into the Bloomberg Terminal. Hey, Ava, thank you. We really appreciate it.

20:28Carol Massar:Ava Benny Morrison, Bloomberg News senior legal reporter, joining us there. You're listening to the Bloomberg Business Week Daily Podcast. Catch us live weekday afternoons from 2 to 5 Eastern. Listen on Apple CarPlay and Android Auto with the Bloomberg Business app. Or watch us live on YouTube. Well, President Trump said he would allow tariff relief for some ground beef imports and a bid to lower prices for American consumers. It's a key concern ahead of November midterm elections. We talked about it with our own Jeff Mason earlier in the 2 o 'clock hour. Here's what the president said, though, on Truth Social.

21:03Carol Massar:He said that for the next 90 days, the United States will allow up to 300 ,000 metric tons of product for ground beef to be imported with no out-of-quota tariff. The president went on to say, we have a commitment that this beef will be sold at 25 % below current market prices. I still feel like, and I think folks think, there are still more details to be known. What we do know, or what we don't know, is what we want to ask our next reporter. Eilena Pang is Bloomberg News agriculture reporter. She joins us on set. Eilena, you've been following what's been going on in beef prices. We've all moaned about the high cost.