Bessent Mobilizes to Defend U.S. Long-Term Yields… Signals Yen Intervention, Potential Cut in Long-Term Bond Issuance
High Inflation, Fiscal Deficits Push 10-Year Yield to Around 4.65%
“Signals Treasury Will Deploy All Available Tools to Defend Long-Term Rates”
U.S. Treasury Secretary Scott Bessent is sending signals to the market that he intends to curb the soaring yields on U.S. long-term Treasury bonds, unveiling a range of potential moves from intervention in the foreign exchange market to possible adjustments in long-term bond issuance. As long-term rates have reached record highs amid the Iran war and persistent fiscal deficits, analysts note that the Treasury is mobilizing all available policy tools.
According to Bloomberg on August 9 (local time), Wall Street bond traders and market strategists have interpreted Secretary Bessent and the Treasury’s recent series of actions as efforts to rein in rising long-term Treasury yields.
A representative example is the joint intervention by the U.S. and Japanese monetary authorities to support the Japanese yen. At the end of last month, the United States, in cooperation with Japan, sold dollars and bought yen, launching a coordinated intervention to defend the yen for the first time since 1998.
Market observers believe this move is aimed not only at addressing yen depreciation but also at considering the U.S. Treasury market. If Japan, to secure the dollars needed for yen purchases, were to liquidate a large volume of its U.S. Treasury holdings, this would push down long-term bond prices and further raise yields.
Secretary Bessent has also discussed the possibility of using the Federal Reserve’s Foreign and International Monetary Authorities (FIMA) repurchase agreement facility, allowing Japan to secure dollar liquidity without selling U.S. Treasuries.
The U.S. Treasury’s recently released quarterly refunding plan has also drawn attention in the market. While outlining its future bond issuance outlook, the Treasury substituted the phrase “potential increases” with “potential changes” in its statements.
According to Bloomberg, the bond market has interpreted this change in language as leaving open the possibility of reducing long-term bond issuance. Reducing the supply of long-dated Treasuries could ease downward pressure on bond prices and upward pressure on yields.
Bessent Endorses Fed Chair Walsh’s Communication…Acting to Defend Long-term Yields
Analysts also see Secretary Bessent’s recent public endorsement of Federal Reserve Chair Kevin Walsh’s communication style as part of this overarching strategy. Last month, Chair Walsh stressed the need to contain inflation at a Federal Open Market Committee (FOMC) press conference but did not lay out specific steps or a timeline for lowering prices. The market interpreted this as a hawkish signal, and long-term Treasury yields spiked as a result.
Subsequently, Secretary Bessent defended Chair Walsh through CNBC interviews and posts on social media, stating that the market needs to “detox” its readings of the Fed’s policy language and voicing support for Chair Walsh’s new communication strategy.
Priya Misra, portfolio manager at JP Morgan Asset Management, remarked, “Both the Fed and the Treasury are likely concerned about the current level of long-term rates. The intervention in the foreign exchange market with Japan, support for Chair Walsh, and the possibility of reducing long-term Treasury supply are all signs that the Treasury is closely monitoring rate movements and will not hesitate to use every tool at its disposal.”
Mortgage and Corporate Borrowing Costs Rise with U.S. Treasury Yields
The Trump administration’s policy goals are also partly behind Secretary Bessent’s sensitivity to long-term interest rates. U.S. President Donald Trump has repeatedly stressed reducing borrowing costs as a core economic policy objective.
In an interview with Bloomberg last year, Secretary Bessent said that after President Trump’s return to the White House, the administration is focusing on lowering the 10-year Treasury yield.
The yield on the 10-year Treasury note serves as a benchmark for a variety of borrowing costs, including U.S. mortgage rates. In November of last year, Secretary Bessent even referred to himself as “America’s top bond salesman,” stating that Treasury yields are a critical indicator for measuring policy success.
However, some point out that the Treasury’s ability to bring down long-term yields is limited. This is due to ongoing high inflation and a fiscal deficit of nearly 2 trillion dollars annually, which continues to add to Treasury supply.
Expectations that the Trump administration’s tax cuts will further expand government debt, as well as political uncertainty surrounding Federal Reserve independence, are also weighing on the bond market. On top of that, the Iran war has driven global oil prices sharply higher, creating additional upward pressure on inflation. As a result, the yield on the U.S. 10-year Treasury note recently climbed to around 4.65%, higher than at the start of President Trump’s second term.
John Bellis, U.S. macro strategist at BNY, said, “Given current fiscal spending policies and the ongoing war, it will not be easy to ease pressure on long-term interest rates.”
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