A Treasury showdown with the bond market

0:01NPR.

0:06Treasury Secretary Scott Bessent is taking a bit of a licking in the financial press right now. A billionaire investor who used to work with him wrote an op-ed in the Wall Street Journal warning that Bessent was trying to buy his way out of a difficult conversation. Yeah, and executives at different investment firms have described Bessent's strategy as self-limiting, self-defeating, even financial repression. So why are these guys picking on Scott Bessent? Well, starting next week, the Treasury plans to start buying back a lot more U.S. government bonds than it usually does, at least double. And judging by the reaction, not only do investors dislike this idea, they might not even believe the Secretary's rationale for doing it.

0:49This is The Indicator for Planet Money. I'm Adrienne Ma. And I'm Waylon Wong. Today on the show, we will unpack this whole mess to explain what the Treasury Department is trying to do, why it may be headed for a three-way standoff with both bond markets and the Federal Reserve, and what this means for everyday borrowers.

1:10Support for NPR and the following message come from Washington Wise. Decisions made in Washington can affect your portfolio every day. Washington Wise from Charles Schwab is an original podcast that unpacks the stories making news in Washington. Listen at schwab.com slash Washington Wise. This message comes from Superhuman. Superhuman brings together connected tools like Grammarly, Docs, and Mail into one productivity suite. Built on the idea that low-value tasks crowd out meaningful focus, Superhuman meets teams where they already work. It operates proactively alongside writing and email workflows to help clear what is in the way.

1:51Superhuman from the makers of Grammarly. Start streamlining your workflows with Superhuman today at superhuman.com. This message comes from Dell Technologies. Interruptions happen at work, but with the Dell Pro laptop powered by Intel Core Ultra with vPro, built with optimized battery and built-in intelligence, your tech won't slow you down. Dell.com slash Dell-Pro. Built for you. Before we explain what the Treasury Department is trying to do, let's do a quick recap of the U.S. government bond market. You know, for those of us who aren't fixed income superfans. Waylon, you are the only fixed income superfan I know.

2:33There are dozens of us. I'll have you know. Dozens. So the U.S. government sells notes and bonds called treasuries, and the treasury market is around$30 trillion. It is a bedrock of global financial markets, and these bonds are considered some of the safest investments out there. That's because treasuries are essentially IOUs. Investors that buy these bonds are loaning money to the government, and the U.S. government is a reliable, low-risk borrower. Treasury investors are super confident that they'll get their money back. Now, there are all kinds of treasuries out there. Some come due in two years, others in five years or 10 years, all the way out to 20 and 30 years.

3:14And these treasuries pay out at different returns or yields to investors. Typically, a shorter dated treasury, like the two-year, pays out less than a longer dated one, like the 30-year. Ejindu Ume is an economist at Miami University in Ohio. He goes by EJ. He says that these longer-dated bonds tend to have higher yields because of the uncertainty factor. A lot can happen if I'm holding on to a 30-year bond, right? Who knows where the economy is going to be? Who knows where the bond market is going to be? I want to be compensated for the additional risk. And lately, investors are demanding more compensation for these longer-dated treasuries.

3:50These yields on the 10-, 20-, and 30-year bonds have touched highs not seen since the early 2000s. EJ says there are a few reasons for these high yields. One is that investors are expecting that inflation will persist. Another is that there's a lot of bonds for sale right now and not just from the U.S. government. Tech companies are selling their own bonds to raise money for their AI build-outs. When there's a lot of bonds to choose from, the government has to offer a higher rate to attract investors, especially when a corporate bond seems maybe as risk-free as a government one. I can buy a Microsoft bond.

4:25I think they're really, really safe. by that as opposed to buying the government bond. And so less demand for the government security, again, puts upward pressure on the yields. Those are some of the reasons yields on treasuries are high at the moment. The 30-year is at over 5%. And EJ says this is a problem for the administration because the government's debt just hit$40 trillion. The U.S. has a huge pile of debt and high yields on treasuries means higher borrowing costs. High yields can also be a problem for you and me and really anyone who wants to borrow money. Because treasuries are considered risk-free, their yields are the base for other interest rates in the economy.

5:03Take the 30-year mortgage. The interest rate for that is based on the 10-year treasury. So these high yields pose a dilemma for Scott Besant, especially because President Trump has made his desire for lower interest rates very well known. What's a treasury secretary to do? Well, now it is time to talk about this plan that the Treasury Department unveiled. Starting next week, it plans to at least double the size of its buyback program for longer-dated U.S. government bonds. That's right. Now, the Treasury Department already has a program where it buys back these bonds. It does this to help the market for these bonds to run smoothly.

5:38When the Treasury Department buys back, say, 20 - and 30-year bonds, it's basically acting as an eager customer. It pumps up demand for these bonds, and that causes prices to go up and yields to come down. The problem with the Treasury Department's plan is that Scott Bessent is not talking about lowering yields. He told CNBC that his department is doing this to improve liquidity for longer-dated bonds. That's financial jargon for making sure there are enough buyers and sellers in the market. Right, so nothing to do with lowering yields and interest rates. Yeah, I mean, that is what the Treasury Secretary is saying.

6:13But the market's chilly, even hostile reaction to this buyback announcement could be a signal that they're not buying it. They're not buying the buyback. They're not buying the buyback. They don't believe him. And that is according to Eric Jacobson. He specializes in fixed income at the research firm Morningstar. The president has been very outspoken about wanting to see interest rates lower. And as the Treasury secretary, in effect, Scott Besson serves at the pleasure of the president. So even though the Treasury has said that this activity is meant to address liquidity in the Treasury market, a lot of the rest of the world believes that it's a political decision to try and keep interest rates down to keep the president happy.

6:56When the Treasury announced the expanded buyback program, Treasury yields went down for a little bit, but then they went back up again. Eric took this round trip as a sign that investors are rejecting the Treasury's plan. And he points to two big reasons why bond investors are rebelling against the Treasury. Number one, the buybacks don't tackle the underlying economic conditions making investors nervous. Concerns like the country's yawning debt. At$40 trillion, the national debt is bigger than the entire market for U.S. Treasuries. Address it by spending less. That's what they want to see. Whereas they think and see that the Treasury trying to act on interest rates is a way of skirting that responsibility and trying to handle it by other means than actually having some fiscal discipline.

7:41And part of that is trying to keep from mucking around in markets too much. The second reason is that a lot of investors don't want the Treasury mucking around with bonds and interest rates. That role has historically belonged to the Federal Reserve. That's the institution in charge of monetary policy. There have been other times in history when the government bought back bonds to push yields down. It happened in 1961 during the Kennedy administration, during something known as Operation Twist, named after a Chubby Checker song. A banger. Reference probably made more sense in 1961. It also happened after the Great Financial Crisis.

8:18And in both of these instances, it was the Fed that acted, not the Treasury. And in the case of the Great Recession, the economy was in trouble. The Fed wanted to push down interest rates to get people and businesses borrowing again. That is not the situation we're in today. Unemployment is low by historical standards, and inflation is running above the Fed's target. Last week, Fed Chairman Kevin Warsh said that if inflation doesn't come down, the Fed would, quote, have work to do. Work like hiking interest rates? Yeah, that is how the markets are reading the Fed's stance. The question right now is, is the Treasury Secretary working at cross-purposes to the Fed?

8:59if the Treasury Secretary is acting to try and lower interest rates, then he is, in effect, making their job more difficult. A Treasury versus Fed showdown would be bad for investor confidence and the markets. So would a Treasury versus bond market showdown? If Secretary Besant and the markets come together in a game of chicken, I think he's probably in some ways going to blink first in the sense that he's not going to fight the markets forever. There are a lot of ways for the market to sort of beat up on the treasury, if you will. And we probably want to stay away from that if we can. Never a dull moment in the bond market, huh?

9:37Yeah, we made a fixed income enthusiast out of you after all, Adrian. Fixed income enthusiast. Put that on a hat. Yes. A mug. Shop.npr.org. Put that on a bumper sticker. Hog if you think the bond market is the bedrock of the global economy.

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