Market Reaction to Treasury Moves
Recent Treasury actions - the yen intervention, larger buybacks, and signals to tap the Treasury General Account (TGA) - have caused the market to overreact. The moves themselves have been small.
Look at the 10-year Treasury yield, the benchmark rate for global borrowing. Most of its rise happened between last October and around April or May. Over the past few months it has traded in a narrow range: up to about 4.75%, back to 4.65% after the buybacks, back to 4.75%, then down again when the Iran sanctions were announced. Volatility is low. The market has stayed relatively calm.
Why Rates Are Rising
Higher rates come from a strong US economy - the strongest among the large industrial countries. Fast growth pushes rates up, which makes sense. The tech boom is still going, and these companies are issuing debt, which adds more upward pressure on rates. Rates are rising for the right reasons.
The ratio of nominal GDP growth to the 10-year yield is close to 2:1. That is the same ratio seen in the five years before the pandemic and the five years since. Rates are aligned with growth. The world is going back to normal, where rates are no longer held down artificially at or near zero with heavy forward guidance. The 10-year yield is not unusually high compared to nominal GDP growth, so there is no reason to fear bond vigilantes.
When to Worry
The point to worry would be a sharp, disorderly move - if rates jumped from 4.65-4.70% up to 5.25% or 5.50% within a few days or a couple of weeks. That would be a problem. But a slow rise is fine. If next year the economy grows 4% and the 10-year yield climbs to 5% or 5.25%, that is not a bad environment. It looks like the boom of the late 1990s, when a large jump in productivity happened. Kevin Warsh believes a similar productivity surge is about to start.
Is Secretary Bessent Worried?
Some investors read the string of Treasury moves as a sign that Secretary Bessent himself is worried. Bessent has defended the moves, pointing out that the long end is a thinly traded market and that heavy corporate debt issuance is competing with Treasuries for buyers.
The investors who think he is worried do not know him. He will not be rattled by minor market swings. Even if rates jumped sharply for some reason, he would stay calm - that is his character. His long record as a strong money manager comes from taking emotion out and looking at things in a cold, calculating way. The move in yields should be seen as US yields normalizing to where they belong in a world of nonzero rates without forward guidance.
Yield Curve Control and a "Twist"
Could Treasury try yield curve control? There has been talk of pushing the dollar lower to help exports and run the economy hot, so the US can grow its way out of the $4 trillion debt, as Bessent puts it - a plan some describe as "emerging-market light."
That will not happen. Consider how a twist would work. Some of the money is coming out of the TGA, and the Treasury checkbook can only be drawn down so far before new debt must be issued. In a twist, Treasury would buy back the long end and sell the front end by issuing bills. But Treasury has already said it does not want bill supply to run much above 25% of total net issuance. That caps how effective a twist could be. Beyond these technical limits, the record of Treasury and even Fed twists is not good. The recent moves are better read as Treasury adding liquidity to the market, as Bessent said, not a twist. There is no realistic way to pull one off, so it will not be tried.
The Fed and Kevin Warsh
The recent Treasury actions have not changed how Kevin Warsh is approaching his communication going into tomorrow. Warsh still has to decide how to explain the new Fed reaction function, if there is one. Task forces he set up will produce information on what the Fed will watch and what it may prioritize. Whether that comes tomorrow is unclear, but it will come at some point.
None of this blocks what Treasury is trying to do. Financing is Treasury's job. The Fed's job is low and stable prices, and it has not delivered - inflation has stayed uncomfortably high for a long time. The Fed funds rate is the Fed's main tool for influencing the economy and longer-term rates. There is no real disagreement or inconsistency between Treasury and the Fed. The answer on the Fed's direction should be clear in about 24 hours.
