Treasury Secretary Scott Bessent is determined to put the “fear of God” into the so-called “bond vigilantes” who have been dumping US Treasurys and sending interest rates soaring, according to a private sector economist with knowledge of his thinking.
Bessent is particularly worried that institutional investors will continue to sell long-dated Treasury bonds in a trade that will send prices lower – and yields on the all-important 10-year bond surging to 5%, according to Wall Street executives who deal with him regularly.
That, in turn, could snuff out economic growth as the midterm elections approach since it’s the 10-year Treasury bond on which many consumer rates are pegged – including 30-year, fixed-rate home mortgages.
In response, insiders say Bessent has formulated a plan that could escalate if the vigilantes continue to push up interest rates. It goes beyond the $4 trillion in longer-dated bonds the Treasury purchased last week – and could include temporarily halting the issuance of certain long-dated debt like the 20-year Treasury bond, these people say.
“Bessent knows what he’s up against – it’s how he made his living,” one economist with ties to the White House said, noting that the Treasury secretary was a hedge fund manager before joining the administration.
“He also knows this is a band-aid solution to our debt problems that he needs to take as the midterms approach,” the economist added.
A Treasury Department rep had no immediate comment.
Market vigilantes – whether they’re in bonds or currencies – are the ultimate mercenaries since they seek to capitalize on what they see as bad government policy. In the case of bonds, they are selling US debt while also placing negative “short” bets on US Treasurys looking to make money on price declines as some market participants believe US debt levels are growing to near unsustainable levels.
Last week, the Treasury announced that total debt held by the public and the government has reached an unfortunate milestone of $40 trillion, with debt held by the public surpassing 100% of GDP.
This, coupled with the financing needs to build out artificial intelligence infrastructure competing with Treasury bonds, has helped tank prices for US debt.
That, in turn, has caused a sharp spike in both 10-year and 30-year yields (the 10-year yield hovering around 4.7% and the 30-year comfortably above 5%), prompting Bessent’s recent actions to support bond prices.
Bessent is walking a scary tightrope. Bond vigilantes pounce when they see weakness, and that includes interventions by policy makers like Bessent; the treasury secretary has also also taken steps to prop up the yen to prevent Japanese holders of US debt from selling.
They also believe what he’s doing is the ultimate short-term solution to a more entrenched problem: The US lives well beyond its means.
Though the vigilantes sound like nasty people, they serve a vital function: to instill fiscal discipline on policy makers. That means pushing up yields to better compensate investors for the risk of holding securities that will take a hit if the debt load isn’t cut.
Ironically, Bessent was once himself a currency vigilante; back in 1992, as an analyst for then-hedge fund impresario George Soros, he began shorting the British pound and forcing a massive devaluation that “broke the bank of England” and made billions in profits.
All of which means he knows the currency debt game as well as anyone. “On the positive side yields are spiking because we also have growth from AI,” said one Wall Street executive who deals with the White House. “We also don’t have rampant inflation, but borrowing is becoming a problem for the markets.”
Others are not so sanguine. A veteran trader says the bond markets are getting scared over the rampant rise of debt; from $8 trillion in 2000 to $40 trillion in just 26 years.
“Now the private sector needs to raise trillions for the technology buildout and infrastructure so this is a big f–king deal,” he says. They’re also fretting that the Trump administration – like the administrations before it – isn’t taking necessary austerity steps to cut deficits and debt, choosing instead a strategy of growing out of the fiscal hole.
Meanwhile, as this column has pointed out, long-term rates are high now, but go back to 2000 and they were higher – over 6% – meaning investors still see US assets as safe haven.
Another mitigating factor: The AI buildout is now facing enough opposition— and not just from lefties but also from local communities who are wary of data centers in the back yards — that tech firms are getting concerned it’s going to stall and dampen the buildout, which might be good for Treasury yields in the short term as well.
