Yet Bessent’s decision to intervene in government bond markets in an effort to combat soaring yields belied his studied calm in TV interviews – and reignited fears the US may be on the road to a debt crisis. Half a lifetime ago, in 1992, Bessent cut his teeth in markets shorting the pound alongside George Soros in the chaos that led up to Black Wednesday, when the UK plunged out of the European Exchange Rate Mechanism. Today he is on the other side of the tussle between policymakers and markets.
When the US Treasury intervened to help prop up the Japanese yen earlier this month – crucially by selling euros, not the US dollar – it was widely read as a sign of weakness. Japan is a mega holder of US treasuries, and it looked as though the Trump administration was fretting that Tokyo might be preparing to dump a chunk of them to buy yen – potentially pushing up the yield, or interest rate. The US Treasury’s announcement that Japan would in future be able to use a little-known facility called the Foreign and International Monetary Authorities Repo Facility, effectively to borrow against its treasury holdings without having to sell them, was read as another sign of concern.
As the economist Barry Eichengreen wrote in the FT at the time: “The bottom line is that Washington, fearing the consequences for US financial markets, is reluctant to see foreign central banks use their dollar reserves. This is telling us that the dollar is not the attractive reserve currency it once was.” In last week’s fresh intervention Bessent promised to double the rate at which the Treasury woul buy up the longest-dated bonds – hoping to massage the yield downwards. It was the clearest sign yet of anxiety in Washington about a sell-off that has pushed up yields on 30-year government bonds to levels last seen before the global financial crisis in 2008.
There are several, overlapping reasons for the bond market sell-off. Treasuries, which pay a fixed amount each year, are in part a bet on the future value of money – with higher inflation eroding the real value of those payments. With the Iran conflict slipping towards a forever war, keeping oil prices elevated, and amid concerns about the new Federal Reserve chair Kevin Warsh’s willingness to raise interest rates, investors are fretting more about future inflation.
Another reason lies in the extraordinary AI investment boom. Tech giants have been funding the buildout of vast datacentres by issuing a wall of corporate debt. Debt issuance by the “hyperscaler” AI companies is already $219bn (£160.5bn) so far this year, according to analysis by JP Morgan – potentially offering investors an alternative to treasuries and crowding out public debt.
Third, and most worrying, is the gnawing sense that despite continued robust economic growth, the US is not the rock-solid creditor it once was. US public debt has exploded in recent years, smashing through every forecast. It lurched higher after the financial crisis and took another leg up during the Covid pandemic.
Extract — continue reading at the source.
