The Dilemma of the U.S. Treasury "Interveners": The pressures of deficits, the surge of AI-driven bond issuance, and the stance of Waller make it difficult for the Besant repurchase plan to shake the 4.7% yield.

At the beginning of his term, U.S. Treasury Secretary Scott Bentsen sharply criticized his predecessor for attempting to "reshape" the world's largest bond market, yet he himself has now made similar attempts. Last Thursday, Bentsen announced that he would implement what he referred to as the "Treasury version of twist operations" by repurchasing a batch of long-term government bonds while simultaneously issuing more short-term securitiesthis terminology evokes the famous "twist operation" plan from the 1960s by the Federal Reserve. Bentsen believes that current long-term yields have deviated from their "equilibrium" levels. Indeed, the twist operation caused U.S. Treasury yields to "twist" for a dayafter the plan was announced, long-term bond yields plummeted on Wednesday, only to rebound quickly thereafter. The 10-year benchmark yield, which Bentsen is most concerned about, closed last week at 4.73%, close to its highest level since he took office. All of this indicates that the Treasury Secretary's efforts to reduce borrowing costs (especially as the midterm elections in November approach) are encountering upward pressure far beyond his control. These pressures include: the record debt levels in the U.S. (with a recent indicator showing total national debt exceeding $40 trillion) and across developed economies; a surge in corporate bond issuance led by the AI boom; an inflation rebound triggered by market turmoil following Trump's military actions against Iran; and additional concerns stemming from Fed Chairman Kevin Walsh's unclear policy path. "Any path that can persistently alleviate long-term yields will inevitably touch on areas that this administration is reluctant to engage," noted Matt King, founder of Satori Insights. He stated that narrowing the U.S. budget deficit, a stock market correction, or cooling AI investment would be the only means of lowering long-term yields. The "Return to Normal" Debate Some market participants do not believe that yields have deviated in any significant way. "I think we have returned to normal interest rate levels; 4% to 5% is the normal range," said Edward Yardeni, the creator of the term "bond vigilante," just one hour before Bentsen made his announcement. While the Treasury claims its intervention aims to support liquidity, JPMorgan's interest rate strategy team reported on Thursday that "market functionality has improved significantly this year." Bentsen's yield curve control vision (which aims to influence interest rates of different maturities) has extended beyond government debt, encompassing so-called "super-large corporations"those heavily borrowing to invest in the AI sector. Earlier this month, Alphabet Inc. issued bonds with a maturity of up to 40 years. The Treasury Secretary stated this week that such investments will ultimately be rewarded with faster and non-inflationary economic growth, but are "currently causing short-term capital competition." He suggested that if he were in the CFO position, he would consider issuing more "belly" duration bonds, specifically 5-year securities. Such apparent intervention intentions have even sparked discussions in the market about whether there exists a "Bentsen put"akin to the former "Greenspan put." Chris Turner, global head of markets at ING Groep NV, used this term this week, although many doubt whether Bentsen truly has the power to influence yields. The Treasury did not respond to a request for comment on Bentsen's bond market intervention measures. "Misleading Information" and the Deficit Dilemma In the face of rising yields, Bentsen claimed that investors are being guided by "misleading information," while he himself possesses an "asymmetric" information advantage. "There is a lot of misleading information regarding the deficit," he stated, promising to redirect the market's attention to what he calls Trump's fiscal consolidation plan. Strategist Alyce Andres commented, "Bentsen cannot control inflation expectations nor force nominal long-term rates lower, so he chooses to repurchase to reduce the circulation of some less liquid long-dated securities. However, the latest plan must convince investors that repurchases are a bridge to a better debt trajectory, rather than an attempt to suppress yields without addressing the deficit." Bentsen indicated that in the coming days he would consult with White House budget director Russ Vought "to examine measures from both the revenue and spending sides," suggesting a crackdown on fraud and cuts to state transfers. The "Government Efficiency Department," led by Musk, attempted similar initiatives last year but failed to meet its spending reduction goals. "We are skeptical that the government can take substantial action on the deficit issue," wrote Sarah Bianchi, chief strategist at Evercore ISI, in a research report. In addition to Treasury interest payments (which now exceed $1 trillion annually), spending on Social Security, Medicare, and Medicaid are the main drivers of this year's expected fiscal deficit (around 6% of GDP). Bianchi noted that reforming these benefit programs is "absolutely impossible in the short term," and if the Democrats win at least one chamber of Congress after the midterm elections, it will be even less likely to advance. Bentsen vs. Walsh? What is truly within Bentsen's purview is the adjustment of debt issuance and repurchase strategies. Prior to this week's operations, the Treasury had already adjusted its broader issuance guidance two weeks ago, analysts noted, which paves the way for possible reductions in the issuance size of the longest-term (and highest-yield) securities. Such measures closely resemble the debt issuance strategies criticized by Bentsen during Yellen's tenure and suggest an underlying divergence between him and Walsh. Walsh not only refrained from endorsing the notion of yields deviating from equilibrium but has almost acknowledged the upward movement. On July 29, he stated that although the Fed has not tightened policy in the face of high inflation, "the market has already done a lot of work," and "market prices will continue to react in the directions and magnitudes they deem appropriate." Walsh is also about to face a critical communication momenthe will deliver a speech at the Jackson Hole annual meeting hosted by the Kansas City Fed on Friday. Investors will focus on whether he can repair his credibility following the poor reception of last month's press conference. At that time, Walsh failed to provide a reasonable justification for maintaining interest rates unchanged, avoided any hints of potential rate hikes in the coming months, and mentioned that the Fed's inflation target might be adjusted in January. "We think Bentsen's actions put Walsh in a somewhat awkward position," said Mark Dowding, chief investment officer of fixed income at RBC BlueBay Asset Management. The "Reverse Script" Yet to Be Played Out "If Walsh can truly clarify how they will provide quantitative metrics, how they will utilize information, and give an action plan for the next three to six months, that would truly be a script reversal," stated George Goncalves, head of macro strategy at MUFG, "at the very least, allowing the market to know what to focus on." Walsh hopes to reshape the Fed's balance sheet (which currently holds approximately $4.54 trillion in Treasury bonds) and has mentioned a new "Fed-Treasury agreement," but he has not elaborated on its contents. The original 1951 agreement significantly limited the Fed's influence in the bond market and ended yield curve control strategies. If current U.S. policymakers truly want to reduce borrowing costs, they might need to reverse course. "Repurchases are more symbolic than substantive," Rebecca Patterson, a senior researcher at the Council on Foreign Relations and a former senior investment professional at JPMorgan and Bridgewater, noted, "even if the scale expands, it is difficult to change market dynamics. A more effective and sustainable policy path is through Fed quantitative easing." Before taking office, Bentsen referred to continued quantitative easing (i.e., the Fed's bond purchases) as a "permanent medication solution"; meanwhile, Walsh opposed quantitative easing when he was a Fed governor in the early 2010s and has since been one of its sharpest critics. If the two do not make such a significant policy turnaround, the yield curve will remain investor-driven. "The economy is resilient, and global capital competition is intensifying," said Priya Misra, a portfolio manager at JPMorgan Asset Management, "so rising rates make sense."