Key facts
- Treasury Secretary Scott Bessent is defending the U.S. Treasury's intervention in the bond market.
- The Treasury has doubled its buybacks of U.S. Treasuries to at least $4 billion.
- The intervention aims to flatten the yield curve by buying long-term debt and selling short-term debt.
- Bessent stated that President Trump has complete confidence in Fed Chair Warsh to do the right thing regarding monetary policy.
- Bessent acknowledged the bond market's power, stating it has 'taken out more governments than howitzers'.
Treasury Secretary Scott Bessent is defending the U.S. Treasury's intervention in the bond market, which has doubled its buybacks of Treasuries to at least $4 billion. This move is a new iteration of 'Operation Twist,' a strategy aimed at flattening the yield curve by purchasing longer-term debt while simultaneously selling an equal amount of short-term debt.
Bessent's acknowledgment of the bond market's power comes as Fed Chair Kevin Warsh faces pressure regarding monetary policy. Bessent stated that President Trump has complete confidence in Warsh to optimize the path for both inflation and economic growth, noting that the bond market has 'taken out more governments than howitzers.'
Historically, 'Operation Twist' implementations have had mixed success. The Federal Reserve's attempts in 1961-65 and 2011 yielded varied results, with the former failing due to an overly expansionary monetary policy and the latter being aided by increased money growth. The Bank of Japan's yield curve control policy from 2016 to 2024 is also viewed as having faced challenges.
Economists like Ryan Sweet of Oxford Economics suggest that bond markets may be losing patience with central banks remaining on the sidelines during periods of high inflation or supply shocks, potentially leading to higher long-term interest rates. Paul Donovan of UBS noted that surprising financial markets could question the Fed's credibility, raising borrowing costs.