On Wednesday morning, the US Treasury sent out a press release titled “Treasury Announces Increased Sizes of Nominal Long-End.” The Treasury said it will “at least double” the size of liquidity support buyback operations for 10- to 30-year Treasury debt securities to at least USD 4 billion per operation, effective September 9 to November 4.
The move is regarded by the market as Treasury Secretary Scott Bessent’s intervention against the recent surge in long-term Treasury yields—the 30-year Treasury reached a 19-year high of 5.33% on Tuesday. As shown in this chart made by Karl Schamotta, Chief Market Strategist of Corpay, the immediate market reaction was USD falling against other major currencies, meaning Bessent’s action dampened the market’s expectation of yield curve steepening in the US.
I have been thinking about the best analogy for today’s intervention and I think Bat Signal is the best one (that I can think of). Yes, Bessent today flashed the Bat Signal to instill fear in the market to remind them that they should behave!
Bat Signal, as the name suggests, “fights crime” through signaling. It is a nominal call for Batman, the fearful vigilante, to come out and fight the criminals. Then the criminals, worried that they might be Batman’s prey, may reconsider their actions. That’s how crimes would be stopped by a mere signal.
Bessent’s intervention today didn’t carry a substantial amount. According to the tentative schedule, the Treasury was going to buy back about USD 4 billion of 10- to 30-year Treasurys in total each month. Doubling that will be merely another USD 4 billion. For comparison, the Federal Reserve’s reserve management purchases, a program which purchases Treasury Bills to increase reserve supply, bought USD 10 billion to USD 40 billion of short term securities a month. So the buyback intervention was more a statement that Bessent is on to the long-term yield and is ready to act.
The most important question of this article is then: Bessent is the Batman in this story, right?
No!
Bessent is just the one who switches on the Bat Signal. This would make him Police Commissioner Jim Gordon.
The Batman in this story is the Fed’s credibility and its transparent reaction function. Remember “Don’t fight the Fed”? Yes, one should never misbehave and get the attention of the Dark Knight, otherwise one may end up hanging upside-down at the edge of a tall building.
This is similar to what a credible and transparent Fed does. They lay down some ground rules like their inflation target and relay their expectations publicly (i.e. their reaction functions) so that the market knows that when they misbehave, the Fed will take actions to discipline them. And yes, the superpower of both the Fed and Batman is that they have an unlimited amount of money.
What is happening in the bond market is that since Warsh took the role as chair, the Fed became less transparent about their reaction function (actually other Fed officials are still doing their parts to provide a predictable reaction expectation to the market, but the chair is also doing his best to muddle the messages). The market is set free to explore the potential and it is not sure the Fed will come out to maintain discipline when inflation gets out of control. This kind of uncertainty increases the term premium in long-term bonds.
Back to the treasury buyback program—the Bat Signal in our story. Yes, this analogy is meant to imply that Bessent’s intervention today is merely a Bat Signal without a Batman. The Treasury doesn’t have unlimited money.
As suggested by today’s news that the US government’s gross debt load reached USD 40 trillion, every dollar the Treasury spends has to be borrowed from the market or raised through taxation. An increased repurchase of long-term Treasurys will very likely be matched by an upsized sale of short-term Treasury securities. With T-Bills now accounting for 22.2% of outstanding Treasury debt, still above the 20% ceiling recommended by the Treasury Borrowing Advisory Committee, it may have limited room to upsize this buyback operation.
But so far, the Bat Signal still works, with or without Batman!
The problem of this little analogy is that it assumes the Fed’s ‘forward guidance’ is a superhero—a notion that many would reject. A lot of influential elites praise Warsh for cancelling it and they can’t all be wrong.
Moreover, if Bessent can use a simple signal to tell the market to behave and cap the Treasury yield from rising further without any help from the Fed, why not have the cake and eat it? The Treasury Department is now in the very capable hands of a great former hedge fund manager, what could go wrong? Right?
Right?
