When will Treasury buyers demand a Bessent/Warsh “incompetence premium”? Will buyers of U.S. Treasury bonds start to demand a yield premium to reflect the incompetence of Treasury Secretary Scott Bessent and Federal Reserve chair Kevin Warsh?
This coming week could start to give investors some initial answers.
On Monday Secretary Bessent is scheduled for a 2 p.m. New York time press conference. The announced topic is a new plan to increase pain on Iran’s economy, but Wall Street analysts will be looking for any clues on last week’s Treasury announcement of increased bond buying at the long 30-year end of the Treasury market. That news took a bite out of the U.S. dollar and revived fears in the financial markets of a Japan-style debasement of the U.S. currency in response to the $40 trillion U.S. national debt.
I’d be surprised to hear anything coherent or to the point from the Treasury Secretary.
On Friday morning Fed chair Warsh will give a major policy speech at the Fed’s Jackson Hole gathering of global central bankers. Here the suspense centers on two questions: Will Warsh give any forward guidance on Fed interest rate policy–he has pledged NOT to? And will he lay out any plan for bringing stubborn inflation down to the Fed’s 2% target?
In last weeks reaction–or maybe better yet, non-reaction–to the Treasury plan for buybacks of 30-year bonds, I sensed rising frustration with Bessent. The market seemed to be saying, Yet another plan? This is only the latest ill-conceived attempt at influencing market forces by the Bessent Treasury, which has failed in its stated goal to get longer-term borrowing costs lower. In the administration’s 19 months in office, Bessent has adjusted capital requirements to encourage banks to hold more bonds; supported the GENIUS Act, which established a framework for stablecoins to invest in U..S government securities; and authorized U.S. support for yen intervention, a move that looked custom-designed to dissuade a major foreign holder of Treasury bonds from dumping them to buy its own currency.
All of these attempts–including last week’s plan–share one thing in common: they misunderstand the role of predictability and transparency in keeping Treasuty prices high and yields low. The U.S. Treasury isn’t a hedge fund, whatever former hedge-fund manaher Bessent may want–out to create and play short-te volatility. Investors are willing to buy Treasury bonds because leaders of U.S. financial policy avoid whiplash events like last week’s bond buying panic announcement when long-term yields slipped over 5.30%. They expect a certain level of adult competence–the key problem driving higher yields is the excess U.S. spending. Deal with it–or at least show that you’re prepared to start dealing with it. Don’t talk of a $500 billion increase in defense spending and float the idea of another tax cut and expect bond markets to take a $4 billion shift in buying long bonds seriously as policy.
And over at the Federal Reserve, Warsh talks of letting the bond market do the Fed’s job of controlling inflation through higher bond yields–and thus obviating the need for the Fed to raise its benchmark interest rate. Even ignoring the potential conflict between Treasury and Fed policies, the message in Warsh’s non-policy decision is that no one has a plan, no one is in charge.
How long before bond buyers demand a bigger premium from U.S. Treasury bonds because they look at U.S. monetary policy and see incompetence to match the longer term fiscal irresponsibility of Congress and the White House?
Well, fair enough. We disagree aboutvirtually everything. Thanks forvbtaking the time to spell out your disagreements. That kind of argument is useful for testing ideas. I’d like to flag two points of yours. First, I think Bessent’s “discovery” that the Treasury market currently has a liquidity problem that requires Treasury intervention simply in’t supportd by the facts. Liquidty always gets thinner in thesummer and if you want to arguethat Bessent is afraid that thin liquidity night act to amplify shocks to the market, I might listen. But against that I’d balance Bessent’s harping pretty much since he took his post that he sees his job as bringing down yields on the 10 and 30 year bonds. This mive is totally consitent with his hedge fund fantasy of how the Treasury market behaves. secondly, my 40 plus years of observing the capital markets says they do indeed run on narratives that draw from and are based upon those millions of decisions. but the truth is the market builds narratives all thetime that govern what decisions of those millions it pays attention to. And those narratives do change and they do govern how all those individual decision makers make their decisions. In this case I’d say that the post-bessentdecision reaction does indeed indicate a high degree of skepticism about the effiacy of the move. See Druckenmiller’s Wall Street Joutnal OpEd as evidence. Eve if it was apparently written byan AI. Or bmaybe because of that because AIs only synthesize consensus.
I’m not aware that anybody needs to be anybody to criticize our government or our officials. If you think I’ve made errors, point them out if you’d like to be useful to all of us trying to figure financial markets out. Or sit home and insult me. As you please. You notice I’m not telling you to Shut up because I disagree with you. Which is not a courtesy you’’e extended to me.
“….incompetence premium” – TRULY DISGRACEFUL commentary!
Absolutely PATHETIC.
WHO THE HELL DO YOU THINK YOU ARE TO BEGIN TO SUGGEST THIS ABOUT THE FEDERAL RESERVE CHAIRMAN & SECRETARY OF THE TREASURY !!
Oh please – inform me exactly what qualifications you have relative to their resumes that justify this rhetoric!
The bottom line is spending rose from 20% of GDP to 24% of GDP under biden. Tax income has remained constant at 18% of GDP. We have a spending problem. There has not been a trump tax cut, if there had been tax incomes would have dropped, only a slow down at the increase.
While concerns over federal spending and long-term yield trends are valid topics of debate, the premise that the Treasury and Federal Reserve are operating out of pure incompetence oversimplifies complex financial mechanics and relies on several flawed assumptions.
1. Subsuming Complex Market Signals into a Single Narrative
Attributing short-term movements in the U.S. dollar or long-term Treasury yields solely to recent buyback announcements ignores the vast web of macroeconomic forces at play. Sovereign debt markets respond simultaneously to global growth differentials, central bank balance sheet adjustments globally, inflation expectations, and international capital flows. Defining market volatility as a direct “incompetence premium” ignores standard yield curve dynamics and treats normal liquidity management operations as existential crises.
2. Mischaracterizing Tactical Debt Management
Framing a $4 billion long-end buyback shift against a broader $500 billion spending discussion conflates daily tactical Treasury operations with fiscal policy. Treasury buybacks are designed primarily to enhance market liquidity in off-the-run issues and smooth out supply supply-demand imbalances—not to offset structural federal deficits single-handedly. Judging a micro-liquidity tool by whether it solves macro fiscal deficits sets up a false standard of success.
3. Personifying “The Market” to Fit a Narrative
Claiming “the market is frustrated” or treating price adjustments as a unified commentary on policy competence misrepresents how financial markets operate. The bond market is an aggregate of millions of institutional investors, sovereign wealth funds, and automated algorithms acting on diverse time horizons and strategies. Disagreements over yield levels or policy transmission mechanisms reflect differing risk assessments and positioning, not a monolithic emotional consensus against policymakers.
4. Misinterpreting Flexible Monetary Guidance
Critiquing the Federal Reserve for avoiding rigid forward guidance or allowing market rates to influence financial conditions misconstrues modern central banking strategy. Preserving policy flexibility during uncertain inflation regimes is a deliberate strategy to avoid market lock-in, not evidence that “no one is in charge.” Allowing long-term yields to naturally tighten financial conditions can be an effective mechanism to curb inflation without unnecessarily risking economic disruption through over-tightening the benchmark rate.
Rather than reflecting a collapse in governance, current policy actions represent standard—if actively debated—tools used to navigate significant macroeconomic head-winds. Evaluating these decisions requires analyzing their actual impact on liquidity and market function, rather than dismissing them as mere policy failure.