Bessent’s debt dilemma | USAEMALL.com

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Scott Bessent’s debt maturity problem

Treasury secretary Scott Bessent has a tough choice to make this year. 

Prior to taking office, he and some of Donald Trump’s other economic advisers criticised his predecessor Janet Yellen’s handling of the Treasury market. Yellen had shifted the mix of Treasury issuance towards short-term bills and away from long-term bonds. It was “quantitative easing by another name”, the critics said. In a widely circulated paper, incoming chair of the Council of Economic Advisers Stephen Miran argued that issuing more short-term Treasuries artificially lowers longer-term yields, allowing the government to run up bigger deficits and stimulate the economy without spooking bondholders.

But two months into his term, Bessent is doing exactly what Yellen did. In a recent interview, he said he would keep the bias towards bills in place, and that shifts in the maturity of the debt profile would be “path dependent”. In fact, he’s doubling down. Treasury projections have the department maintaining Yellen’s dollar quantity of long-term debt in the future, rather than just the share of issuance, even though the debt is projected to grow. “Proportionately, he will be issuing even less long-term debt than Yellen,” says Darrell Duffie of the Stanford Graduate School of Business.

There are two interpretations of Bessent’s decision. First is that issuing a higher proportion of short-term debt was never a big deal to begin with, as many have argued. The second is that his criticism of Yellen was valid, but Bessent now labours under the same pressures she did. It is likely that the Trump administration will have to expand borrowing this year to pay for tax cuts. Bessent may want to use the Yellen strategy to keep the market calm while that happens.

But there is a tension here. Investors are worried by the size of the deficit — which has risen fast while interest payments have ballooned. If the deficit does not come down, or if inflation heats up again for some other reason, a secular trend of rising Treasury yields is possible. Indeed, this is what many analysts expect, not just for the US but in most rich nations. If that’s the case, the Treasury will regret not having issued more long-term debt at today’s rates.

And there is a potentially worse scenario. If there is a political deadlock over fiscal policy or bond buyers balk at Trump’s fiscal plans (did someone say vigilante?), there could be a big rise in bond yields. That could happen precisely because the Treasury needs to issue debt quickly to avoid default. If so, they will face even higher borrowing costs.

In sum, if you believe that Yellen and Bessent have engaged in “QE by other means”, you believe they have kept yields lower in the short term, at the cost of not locking in stable long-term financing at what might turn out to be attractive rates.

It’s possible that Bessent’s hands are already tied. If he were to shift to longer-term issuance, the market might revolt — investors are currently running away from duration.

Bessent is working under time pressure, too. The Treasury is quickly burning through its account at the Fed, which could hit empty this summer. But until the debt ceiling is lifted or suspended, no new debt can be issued. That means that once the ceiling is out of the way, a lot of new issuance will have to follow. That would be a good opportunity to extend the maturity profile of the national debt — if the market will tolerate it.

(Reiter)

Tariffs, corporate guidance and earnings estimates

The stock market runs on expectations. What do the next quarter’s, the next year’s, the next five years’ of profit look like? The machine that sets the expectations has two parts: what companies say about the future (known in the trade as “guidance”) and the earnings targets that financial analysts, having listened to what the companies say, collectively establish (known as “consensus estimates”). Stocks rise on strong guidance, rising consensus estimates and estimate-beating performance, and fall on their opposites.

Guidance is primary. The main input to an analyst’s estimate of what a company is going to earn is what it says it is going to earn, either directly or by insinuation. So while Wall Street number crunchers have tried to model the earnings impact of tariffs — a moving target as policy evolves — they will be mostly guessing until the companies tell them what to think.

So, what have companies said, in aggregate? The S&P Global corporate credit research team, led by Gareth Williams, has read through the quarterly comments of 533 global companies trying to figure this out. As it turns out, companies haven’t said much, or at least not much that is useful. He summed up to me as follows: 

What really leapt out at me after reading 533 earnings calls was, one, tariffs are mostly not in guidance . . . so worst case outcomes will lead to a big wave of earnings revisions. Two, the scale of the adjustment we’ve already seen in terms of localising supply chains and, particularly for US companies, reducing production exposure to China. Three, companies seem pretty optimistic that they can pass tariff increases on via prices, which will mean inflation or — if customers resist — margin pressure.

This should not be surprising. The companies are not including tariffs in their guidance for the very good reason that they don’t know what the tariffs are going to be, because the Trump administration keeps changing its mind. Some companies, such as Walmart, have simply ignored the impact of tariffs in setting 2025 targets. Others have done the best they can with the information they have. Here for example is the burrito chain Chipotle, speaking at the beginning of February:

Our guidance does not include the impact of the new tariffs on items imported from Mexico, Canada and China. We source about 2 per cent of our sales from Mexico, which includes avocados, tomatoes, limes and peppers. And less than 0.5 per cent of our sales from Canada and China. If the recently announced tariffs go into full effect, it would have an ongoing impact of about 60 basis points [0.6 percentage points] on our cost of sales.

Those are useful figures analysts will be glad to have. If you do the arithmetic, you’ll see that this guidance implies 25 per cent tariffs on the three countries mentioned. But will the tariffs end up at that level? Chipotle doesn’t know, you don’t know, and President Trump doesn’t know, either. 

Why does all this matter? Because sooner or later tariffs will be in guidance, and when that happens, consensus expectations will probably fall and, presumably, stock prices will have to adjust. The current consensus expectation for 2025 earnings growth for the S&P 500 is 11 per cent, according to FactSet. But if that is mostly a pre-tariff number, that has to come down. Here is Citigroup equity strategist Scott Chronert: 

We expect that many analysts are waiting for management guidance for modelling tariffs . . . individual company complexity makes modelling tariff impacts more difficult than one might expect. In turn, we suspect that the Q1 reporting period will show a negative revision bias such that aggregate consensus estimates will probably move lower for the full year.

That has to be bad, right? And indeed, the proportion of estimate revisions that are upward revisions has fallen sharply recently. This chart is from Chronert’s team:

It doesn’t have to be all that bad, though. First of all, analysts may be nudging their numbers down even in the absence of help from companies, just to be conservative. Three months ago, the expectation was for 14 per cent growth on the S&P. And of course the US market, which as you may have noticed has been down lately, may be ahead of the analysts on this. Chronert also argues that when the revisions do come, the sheer relief of lower uncertainty may give stocks an upward push. As we have said in this space before, what this market is really desperate for is clarity.

One good read

New cosmic mysteries.

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