Slip the surly bonds? Scott Bessent goes on a yield trip

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0:40I would just want you to listen to me more often and evaluate situations with me and lead me towards success. Listening is a form of love. Find resources to help you support your kids and their emotional well-being at SoundItOutTogether.org. That's SoundItOutTogether.org. Brought to you by the Ad Council and Pivotal.

1:05The Economist

1:12Hello and welcome to The Intelligence from The Economist. I'm Jason Palmer.

1:21Today on the show, the grave hacking threat to America's water supplies and the politics of accents in Britain.

1:37But first...

1:45Scott Besant, America's Treasury Secretary, has had a busy week. What with all those Iran sanctions we talked about yesterday. Before that, though, he did something that now has the bond market collectively scratching its head. See, yields, the interest on bonds, are way up. Governments selling bonds is actually borrowing money from the buyer. Higher and higher yields means paying buyers back more and more when the bonds come due. Last week, America's 10-year treasury bonds hit their highest yield since January 2025. Longer-dated 30-year bonds, the highest since 2007. Mr. Besant doesn't seem to like the look of government borrowing being that costly.

2:28So he said that the Treasury would buy up Treasury bonds. Demand goes up, price goes up, yield goes down, problem solved, right? Which is a little like a shop owner buying her own stock to bump up the sales numbers. Government borrowing costs have been climbing across most of the rich world for quite a long time. But in recent weeks, they've flirted with or exceeded their highest levels since the financial crisis 20 years ago. Josh Roberts is our capital markets correspondent. Now, the American bond market in particular is perhaps the most important market in the world. So when there are jitters there, and rising yields mean there are jitters, everybody else starts to worry.

3:16Well, let's start with why the yields are so high in the first place. Yeah, so there's a few different effects going on here at once. Probably the biggest one is the sheer amount that America's government is borrowing every year. This fiscal year, it's set to top$2 trillion. That doesn't make America unique. That's also one of the reasons that other rich world governments borrowing costs are rising. But another reason you have is that inflation is rising as a result in part of the war in Iran that's shot up oil prices and fertilizer prices. It's feeding through to higher consumer prices. When inflation goes up, bonds become worthless.

3:54So this is another factor that's driven up government borrowing costs. And just generally uncertainty about what the government's next move is going to be. Now, in a way, Scott Besant, the US Treasury Secretary, has now added to that uncertainty by this quite weird intervention, seemingly designed to bring government borrowing costs down. So explain to me then what it is Mr. Besant is trying to do with what he's done. It's a bit of a mystery what he's trying to do, because on the one hand, he's gone in and said, I, the US Treasury Secretary, am going to buy back a few billion dollars worth of long-term US government debt.

4:35And that seems like it's an attempt to bring down borrowing costs. When somebody buys a bond, the price goes up. Something to know about bonds, prices and yields move inversely. So when the price goes up, the borrowing cost comes down. So you can see that as what he's attempting to do. The reason it's weird is because the size of intervention he's made is tiny compared with the bond market. He said on each of a few dates, I'm going to buy back$2 billion more worth of long-term bonds. But over the course of a year, the US Treasury issues$2 trillion worth of bonds. So it's quite hard to see this intervention actually kind of really putting a thumb on the scale and moving government borrowing costs.

5:19What indeed we saw the day after he announced this was long-term yields fell a little bit the next day, but then they came right back up and recovered to where they were. So if you can't quite believe that his intervention is going to have much of an impact on its own, it's more about the symbolism, the signal that the US Treasury Secretary is now willing to step into the bond market and try to force yields down. And that itself is unusual, right? If messing with buying and selling bonds, that's normally the central bank's job, no? Yeah, and it's particularly unusual from a secretary like Scott Besant, who formerly was a hedge fund manager, who made his career from betting against governments that tried to unsuccessfully intervene in their own markets.

6:07So, for example, Scott Besant was one of the people who broke the Bank of England in 1992 when it was trying to sustain an unsustainable exchange rate peg. What he's now doing looks a little bit like those failed interventions of the past that he, above all people, should know don't work. The government can't really step in and fix the price of its borrowing. As you say, this is also something that more usually is the preserve of central bankers. And when the Fed steps in to lower long-term government borrowing costs by things like quantitative easing, they're not really aiming to keep the government borrowing cost under control.

6:45They're aiming to use that as a tool to stimulate markets in other ways. When you have the Treasury Secretary stepping in and explicitly trying to bring government borrowing costs down, that's actually the sort of thing that makes investors panic a little bit rather than feeling better about lending money to the government. So if he's a smart guy who has seen this story before and that's what he has chosen to do anyway, What does that tell you, that he doesn't have other tools at his disposal? Well, I would say speaking to bond traders and bond investors over the past few days, maybe the dominant feeling is one of kind of puzzlement.

7:21Nobody's quite sure what he's doing. As I say, the intervention is too small to really move things on its own. So you have to take this as a symbol. So he does have tools to bring down government borrowing costs by more than this, if he wants to use them. But they're pretty extreme. They're known as financial repression. They're measures like forcing banks to hold more government debt, forcing domestic savers to hold more government debt, putting on capital controls so that savers can't invest overseas. They have to invest in US assets, which tends to mean government debt. Now, these are pretty extreme measures.

7:54We have seen them before in the second half of the 20th century to bring down America's war debt. But at the moment, I should stress that these measures are fanciful. Nobody has said the government is going to do this. But if you can't believe that the intervention he's made on his own is going to make much of a difference, you have to start thinking, what kind of signal is he sending? Is there more that he might do in the future? Now, there's actually also a more cynical way to view this, which is Donald Trump, Scott Besant's boss, has repeatedly said that he wants government borrowing costs to come down.

8:27Besant has now gone into the market and done something that is guaranteed to generate headlines and has been generating headlines for the past week. So whether it works or not, he can now tell his boss, look, I've been doing something to bring down government borrowing costs. That's what you wanted. So again, we're in a story where pleasing Trump is what's deciding policy now in the Treasury as it has been for so long in the Fed? Yeah, we are really getting the politicization of these really important institutions. And the struggle here is that they're being tugged in different directions. Inflation has gone up.

9:02More likely than not, as a result, the Fed is going to need to tighten monetary conditions. It's going to need to raise rates, maybe not a lot, but it's certainly not going to want to lower them at the moment. On the other hand, we've got the Treasury acting to try and bring down long-term yields, which is the same, basically, or similar to lowering interest rates. So you've got pressure on these two institutions pulling in different directions. Now, I should say the Fed has an awful lot more firepower than the Treasury does. If the Fed wants to go out and buy government bonds to bring yields down, it can spend hundreds of billions of dollars, because after all, it's the Fed that issues the currency in the first place.

9:43The Treasury only really has the balance sheet at the moment to spend$2,$4 billion buying bonds back. So in a true tussle, it would be probably the Fed that wins. The thing that changes that is if they're both acting under the influence of the president and doing what he wants rather than what would actually fulfill their mandates, in the Fed's case, keeping inflation under control, then who knows what happens next. And all of that tension is really going to be under focus at Jackson Hole, the central banking conference that begins on Thursday. Josh, thanks very much for your time. Thanks for having me, Jason.

10:29The more you listen to your kids, the closer you'll be. So we asked kids, what do you want your parents to hear? I feel sometimes that I'm not listened to. I would just want you to listen to me more often and evaluate situations with me and lead me towards success. Listening is a form of love. Find resources to help you support your kids and their emotional well-being at SoundItOutTogether.org. That's SoundItOutTogether.org. Brought to you by the Ad Council and Pivotal. In a world where AI is changing every role in every industry, knowing who actually has deep expertise matters more than ever.

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12:07In battle, there's one surefire way to defeat your enemies. Cut off their most urgent requirement for life, water. Who can forget the story of the Ostrogoths trying to cripple Rome in 537 by destroying the aqueducts? Or a bit more recently, America threatening to take out Iran's seawater desalination plants. Water will always be a vulnerability, more vulnerable in some places than in others. American water facilities have come under attack in recent weeks. Shashank Joshi is our Washington bureau chief. We know that hackers got their way into facilities in at least seven states, maybe a dozen or so.

12:54And American officials believe that Iran is responsible. This is a really serious reminder of just how vulnerable American critical infrastructure still is, despite years and years of warning that something like this could happen. Well, let's first talk about what you mean when you say water facilities under attack. What's happened? So water plants, Jason, have something called operational technology, which is kind of like the interface between the computer systems and the machinery that makes stuff happen, you know, like a water pump, for example. And hackers have been able to get access to that operational technology through various means.

13:38They were not able to make the water unsafe to drink, but they did various other things. So for example, in some counties, including one in Georgia, customers were asked to boil their water because a drop in pressure caused disruption to the water supply. So these are things like the way the water is brought into the facility, the way that it's treated, the chemicals that are added, all of that stuff can be affected. And if you look at these intrusions, these were not really fancy cyber attacks. These were not the kind of AI-enabled, whizzy, really sophisticated intrusions that you may be reading about in recent weeks.

14:15These were basically quite simple attacks on infrastructure that was connected up to the public internet that in many cases should not have been and should have been secured with much, much better passwords and things like that. Well, why is water security so low then? Why was this comparatively easy to do? We've known this is a problem for a long while, and I think it's useful to compare American water facilities with the electricity grid, for example. The electricity grid has to meet cybersecurity standards that are overseen by a federal commission. There's no equivalent requirements for water.

14:51Electricity is generally run by big, well-funded, tightly regulated operators. Now, water is very different, right? It's heavy, it's expensive to move, and it's much more localized as a result. Around 90 % of utilities, which are mostly owned by local governments, serve fewer than 10 ,000 people each. So if you think about the funding necessary to harden your computer systems and get the latest technology, to get the IT talent that you need to secure these systems, these operators just tend not to have it. And so the computer systems tend to be obsolete. And we have seen this time and time again.

15:28Iranian hackers broke into the control systems of a New York dam back in 2013. In 2023, they seized a pump at a water plant in Pennsylvania. And I could give you countless other stories of breaches at water utilities. So alarm bells have been ringing for a long, long time. So why hasn't anything been done in that interim? So Jason, part of this is the structural problem of the nature of these water plants, as I just described. These are small, fragmented. It's difficult for them to kind of get the resources they need. But I think the other problem is politics. So, for example, during the Biden administration, the EPA, the Environmental Protection Agency, which is the federal agency that oversees lots of these things, sought to compel states to review and report cyber threats to water systems.

16:12And what happened was the Republican state attorneys general in Missouri, Arkansas, and Iowa, joined by various industry groups, the American Water Works Association, the National Rural Water Association, they sued the EPA, citing federal overreach and saying, you know, this is burdensome. You can't put all these federal regulations on us. And the agency pulled back. So there has been this sense that the federal government has struggled to impose its will on states. And states, backed by many Republicans, have said we don't want this regulation suffocating us. So we are only now beginning to see some legislative efforts sponsored by various people, Republicans and Democrats alike, that are attempting to bring some of this oversight into the industry in a more aggressive way.

16:58Well, you would expect so, given the recent attacks in particular. That's right. So, for example, on August 5th, we saw the American Water Works Association, which did oppose that Biden-era proposal. They endorsed this act that was sponsored by Rick Crawford, who's a Republican congressman from Arkansas, that would create an independent body that would draft minimum cybersecurity standards under the EPA's oversight, kind of in the way that's done for electric utilities. At the same day, we saw Tom Cotton, who's a Republican senator. He wrote to Scott Besant, the Treasury Secretary, and he said, look, you know, And we need changes to the tax code and other regulatory tweaks to encourage water plants to invest in better security.

17:35So I think the politics of this is changing because it's become so abundantly clear that this stuff is not secure and that what Iran is able to do today, well, you know, maybe China could do tomorrow. And before any of this legislation really bites and this fragmented system you described gets sort of locked down, Iran or China could still do whatever they like. Well, we've already seen years of what cyber experts would call reconnaissance in American systems. That means not hacking them to disrupt them now, but understanding what the networks are like, preparing to lay the groundwork for future sabotage.

18:07There's been a huge Chinese campaign called Vault Typhoon that was not just utilities, but also ports, airports, transport nodes, loads of different things. Almost the Chinese preparing for a future conflict. The Russians have been poking around American water plants for longer than I can remember. They've been doing it for years. And so this is, I would say, the most recent wake-up call. It's by no means the only one. But to some degree, it's difficult to act when there's a sense that the president doesn't see this as a major threat, right? When all of this unfolded and Donald Trump was asked about this, he said this probably wasn't Iran.

18:45He said he didn't think there had been an Iranian attack, which is definitely not what his own intelligence agencies think. And he said, Iran's got bigger problems than worrying about Minnesota. This reminds me of 2016 when Donald Trump was playing down Russian cyber attacks on America's elections that year and said, yeah, it's probably someone sitting on their bed in their parents' basement. And once again, he's playing down these state sponsored attacks, which are almost certainly coming from Iran. He has done serious and lasting damage to the cybersecurity and infrastructure security agency, CISA, which is the main federal body that does cyber defense.

19:18It's got low morale. It's got heavy staff turnover. Its leadership is turning over. And in that environment, it's very, very difficult to fix these gating holes in America's cyber defences. Shoshan, thanks very much for your time. Thanks so much, Jason.

19:46On the first day that Andy Burnham became Prime Minister, things were going to sound a bit different. I have just come from Buckingham Palace. Take Buckingham Palace. None of his predecessors, at least not in the age of recording, have pronounced Buckingham quite that way. Lane Green is our language expert. And through his social media channels, you can also hear the difference. You go to Chip Yarder. I like a babby's head. That's a babby's head. He never ate steak pudding. Oh, we call him a baby's head. That's what I said. Or a rag pudding. That's what I said. He's the first English prime minister to rhyme words like class with gas.

20:28In other words, he sounds like a northerner. Much more so than anyone who's ever taken office at number 10 Downing Street. Three things you probably already know about me. I go to a lot of gigs. I do like a pint. And I have been known to give a DJ set from time to time. Andy Burnham calls his own accent generic northern. But millions of Britons talk something like he does. Raised near Liverpool and later moving to Manchester, he's often seen as a bit of a pleaser. But it's impossible to please everyone, and especially in those two rival cities. What does Everton Football Club mean to you? Everything.

21:04I can't remember anything other than Everton Football Club. It's from my earliest memories it's seeped in. Now, in recent history, not every British Prime Minister has sounded exactly the same, but for the most part, they've sounded, dare I say it, a bit posh. In the late 1970s, Jim Callahan's R's in words like worst and work and party and rewarding were a giveaway. I think it's a basic feeling that you want to do what's best for the country whilst you lead your party. Callahan came from Portsmouth, near the southwestern part of England, where R's are still sometimes pronounced after vowels. I've had a very enjoyable life in politics, and I hope in some sense is rewarding.

21:49In the 1960s and 70s, Harold Wilson's Yorkshire roots were also reflected in his accent, though he was less easy to instantly peg as a northerner than Andy Burnham is. President Kennedy said once that if you stand still at home, you stand still around the world. We believe that we can't go on standing still, and this program is a way to get us on the move. Two more recent prime ministers, Sir Tony Blair and Liz Truss, grew up in the North themselves, but they never sounded like it. And we've had some superb results in the country. Results like Pendlin, Hindburn, Nuneaton, Walthamstow, Darlington here in the northeast where there was a very, very strong...

22:26Things were different in the 19th century. Robert Peel, who was prime minister in the 1830s and 1840s, was known for a Lancashire accent. And William Gladstone, who was born in Liverpool to Scottish parents, was said to have a northwestern accent as well.

22:44Though it's hardly apparent in this formal greeting to Thomas Edison, which is the first recording of a British prime minister ever, from 1888.

23:01But by the mid-20th century, a cut-glass, so-called received pronunciation, held sway from Oxbridge to the BBC to, of course, Westminster. That particular mid-century accent now sounds almost a bit comical. It disappeared swiftly as the 1960s made working class and regional accents cooler in the wider culture. But a kind of southeastern posh voice still acted as a sort of standard. Think of the accents of Margaret Thatcher or David Cameron or Boris Johnson. Her Majesty the Queen has asked me to form a new administration, and I have accepted. Her Majesty the Queen has asked me to form a new government, and I have accepted.

23:47I have just been to see Her Majesty the Queen, who has invited me to form a government, and I have accepted.

23:58Right now, there is talk in Westminster about how people talk, with some MPs wanting the commons to sound more like the common people. Researchers at Manchester Metropolitan University and at Cambridge are now looking into accents used in Westminster. One of them has already found in her earlier research that the British public is probably not ready for a working class East London or Essex accent at No. 10 Downing Street. People said that they rated an Essex-accented speaker as about 11 % less intelligent than one who spoke with received pronunciation. So while Andy Burnham has knocked down one barrier, for many other people across Britain, there are still many to go.

24:53That's all for this episode of The Intelligence. We'll see you back here tomorrow.

25:16The more you listen to your kids, the closer you'll be. So we asked kids, what do you want your parents to hear? I feel sometimes that I'm not listened to. I would just want you to listen to me more often and evaluate situations with me and lead me towards success. Listening is a form of love. Find resources to help you support your kids and their emotional well-being at SoundItOutTogether.org. That's SoundItOutTogether.org. Brought to you by the Ad Council and Pivotal. From globalization to innovation, sustainability to market volatility, there's always more than one side to a story. Explore different perspectives on today's most important business and economic issues with the Flipside podcast from Barclays Investment Bank.

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