There is not any Bessent put within the Treasury market | USAEMALL.com

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Good morning. The Mar-a-Lago Accord is dead on arrival. Chief of the Council of Economic Advisers Stephen Miran, who championed the idea of a negotiated reduction of the value of the dollar and a reordering of global trade flows, said in a recent interview that the idea has no traction in the White House. It was a dumb idea and we’re glad to see it go. Email us: [email protected] and [email protected].  

The Bessent put

Scott Bessent, the Treasury secretary, really wants Treasury yields to fall; he talks about it all the time. This is just as you might expect. High Treasury yields act as restraint on what the government can spend on tax cuts, battleships, or whatever else. It is the Treasury secretary’s job to keep that restraint as loose as possible.

What is a bit surprising, at least to us, is the idea — which is gaining currency — that Bessent has significant control of Treasury yields, long-term yields in particular. The maxim “Don’t fight the Fed” has become “Don’t fight Bessent’s Treasury”. An recent article in Bloomberg encapsulated these ideas:

In the past couple weeks, chief rates strategists at Barclays, Royal Bank of Canada and Société Générale have cut their year-end forecasts for 10-year yields in part, they said, because of Bessent’s campaign to drive them lower. It’s not just [Bessent’s] jawboning . . . Bessent can follow [the rhetoric] up with concrete action like limiting the size of 10-year debt auctions or advocating for looser bank regulations to boost bond demand or backing Elon Musk’s frantic campaign to cut the budget deficit . . . 

Unhedged is sceptical about Bessent’s degree of control over the biggest, most liquid, most global market there is (short of the market for US dollars). Let’s consider all the levers he can pull.

He can have the Treasury issue more (short term) bills and fewer (long term) bonds. In a recent letter, we discussed how Bessent disparaged this strategy as “QE by other means” when his predecessor Janet Yellen (allegedly) deployed it. Now Bessent is deploying it himself, and Guneet Dhingra, head of US rates strategy at BNP Paribas, thinks he can keep on doing so for longer than the market thinks.

There is a natural limit on bill issuance. A flood of supply could drive the yield on bills above other short-term interest rates available in the money markets. If that happens, it is clear the Treasury is not getting a good deal for taxpayers. But Dhingra thinks that there is room for the government to finance itself with nothing but bills through at least the end of 2026 and perhaps even through 2027. “You can think of the long-term strategy as buying a lot of time, and hoping the long-term rate gets lower — either because inflation is lower, or because the term premium falls when the fiscal situation improves,” Dhingra says.

He can create regulatory incentives for banks to buy more Treasuries. The key regulation would be the supplementary leverage ratio, as Steven Kelly of the Yale Program on Financial Stability explained to me. The SLR is a ratio that divides banks’ common equity by their total assets; the resulting percentage must be above a certain threshold, depending on the bank’s size. During the Covid epidemic, both Treasuries and central bank reserves were temporarily excluded from the calculation altogether, in order to loosen conditions in the Treasury and credit markets. In 2021, as the exclusion expired, the Fed said it was “inviting public comment on several potential SLR modifications”. Nothing came of that, but Kelly says the regulatory stars are aligning to reduce the weighting of Treasuries in the SLR. This would make it more attractive for banks to hold Treasuries (they’d have to hold less capital against them). This is quantitative easing where the buyer is commercial banks rather than the central bank. Kelly thinks it is very likely to happen.

He can badger the Fed into restarting quantitative easing. In the case of a crisis in the Treasury market, the Fed will do this anyway. Short of that, best of luck, Mr Secretary.  

He can do something wacky. For example, he could try to establish a sovereign wealth fund, and have it buy Treasuries. The head of fixed income at a large asset manager, who did not want to be quoted talking about “outlandish ideas”, says that this “starts to look very much like monetisation and would probably crater the dollar”.

He can encourage Congress to pass a budget that meaningfully reduces the deficit. This would work but might turn out to be hard. 

It seems to Unhedged that all of Bessent’s options save the last one are at best delaying actions, designed to keep higher yields at bay until the fiscal situation improves. Even in this capacity, they may only help at the margins. If the fiscal picture does not improve, funding the government with bills just means issuing bonds at a higher rate a year or two down the road. Short of giving Treasuries no leverage ratio weighting at all, banks are not going to load up on Treasuries if they see no fiscal relief — and, as such, falling yields — on the horizon.

There is no Bessent put. The best the secretary can do is play for a bit more time.

Bears? What bears? 

A fair amount of huffing and puffing followed the release of Bank of America’s most recent Global Fund Manager Survey, which showed a huge drop in manager allocations to US equities and a huge fall in growth expectations. But remember, the survey, like all surveys, is “soft” data: it tracks what people think or say, rather than what they do. And if fund managers are backing up their bearish words with actual selling, it is not showing up in the flow of cash into US equity funds.

US equity flows last week were $24bn, according to EPFR, the biggest weekly increase in 2025 by a wide margin. Looking at the flows data on a rolling four-week basis, the trend is clearly up:

It is worth noting that this may not be a good signal. Michael Hartnett, the BofA strategist who oversees the GFM survey, writes in his staccato style that the strong flows show that “no one really believes [in] tariffs . . . global investors are not anywhere close to short US or global equities . . . bad news could have bigger impact than good news”. Markets climb a wall of worry, as the slogan goes. But they roll down a mountain of optimism.

One good read

Human diversity.

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