Treasury Secretary Scott Bessent desperately needs a reset

Putting it mildly, Treasury Secretary Scott Bessent has had a disappointing month. First, his dubious use of public funds to support Japan’s yen was called in question. Then he embarked on a futile attempt to manipulate the bond market, which led legendary hedge fund manager Stanley Druckenmiller to publicly upbraid his former mentee for the amateurish gambit. Finally, after promising to unleash "the greatest coordinated economic isolation in the history of the world" on Iran, Bessent’s big reveal proved underwhelming, leaving far more questions than answers. 

According to CNBC, more missteps may be in the offing, with Bessent thinking of financing buybacks of long-term government bonds with funds held in the Treasury General Account, or TGA. That’s the government’s $954 billion checking account, which it has kept intentionally large in recent years for use in case of emergencies, like during the increasingly frequent government shutdowns.

None of this is guaranteed to get markets to do what Bessent wants, which is to lower the cost of borrowing throughout the economy. As Druckenmiller wrote in The Wall Street Journal, Bessent is doomed to lose the battle to lower bond yields, and the "only variable is how much" he spends "before conceding." The worst thing to come out of all this would be to have the Treasury Department’s credibility diminished in the eyes of Wall Street and the global investment community it relies on to help finance a U.S. federal budget deficit that is approaching $2 trillion. Yet, that’s about the only thing Bessent, a former hedge fund trader himself who many expected to be the Trump administration’s "adult in the room," seems to have accomplished.

Bessent badly needs a reset — for the sake of the economy.

First, he should pledge not to run down the TGA. The original (moderately bad)  idea was to retire longer-term bonds and replace them with new debt instruments with much shorter maturities that carry lower rates of interest. The new (very bad) concept, as outlined by CNBC, would effectively inject new cash into the financial system at a time when households are screaming for relief from years of elevated inflation. Call it quantitative easing, except it’s a.) coming from the Treasury and not the Fed, and b.) would partially counter the efforts of the White House’s handpicked Fed chair, Kevin Warsh, to tighten financial conditions.

The scheme also violates the laws of prudent cash management. From the climate-related disasters that are happening with increasing frequency to the various debt ceiling standoffs, the rising number of extenuating circumstances hitting the economy necessitate a large government cash cushion. What’s the right size of that cushion? The Treasury lays out hundreds of billions every week, and it only carries around $200 billion extra as a buffer, on average, according to an analysis by the Treasury Borrowing Advisory Committee, or TBAC, the private sector committee of finance professionals that advises the Treasury on its borrowing. Cash needs vary from week to week, and the TBAC said that full redeployment of excess cash held in the TGA isn’t practical.

Second, Bessent should pledge to adhere to the original goals of the Treasury buyback program, which were designed to help improve liquidity in so-called off-the-run maturities. Treasury is constantly issuing new bonds, and trading sometimes thins in "last year’s models." The goal was simply to ensure consistency — not to "ameliorate periods of acute market stress," which is what Bessent is flirting with doing. He now wants to increase its buybacks of longer-term government bonds "by at least double," an amount analysts figure would bring purchases to $32 billion per quarter.

There’s simply no recent precedent for a Treasury secretary using buybacks to manipulate yields. And the timing — less than three months before a key midterm election — makes Bessent’s intervention look more like a political act than something that benefits the U.S. economy. The more that the Treasury acts in the interest of politics rather than taxpayers, the greater the odds that it risks undermining confidence in America’s $31.5 trillion Treasury market by signaling desperation to markets and voters. There’s still time to retreat, and Bessent should take the opportunity to save face before it’s too late.

Third, Bessent should prime the bond market for a necessary increase in the issuance of longer-term bonds next year. Bessent has relied to an unusual degree on shorter-term debt and their lower rates of interest to fund America’s deficit spending despite attacking his predecessor Janet Yellen for the same policy. A third of America’s marketable debt outstanding matures in the next 12 months, close to the highest proportion since 2010, if you exclude the early pandemic months. One day, the U.S. will have to refinance this short-term debt, and the risk is that a massive wave of maturities will arrive when interest rates are even higher than they are today.

Fourth and perhaps most urgently, Bessent should aim to underpromise and overdeliver. He’s made an unfortunate habit of doing the opposite. Ahead of Bessent’s news conference this week on Iran sanctions, he had floated a looming "economic D-Day." He wrote in the Financial Times that he was about to launch "the single greatest financial offensive ever marshaled against an adversary." 

Instead, the news conference amounted to more threats and the promise of sanctioning a "major" financial institution that went unnamed. The message harkened back to Bessent’s early pronouncements that he was laser focused on getting 10-year Treasury yields lower (still not there) and his 3-3-3 campaign of 3% budget deficits (not happening); 3% economic growth (still not there); and 3% growth in energy production (maybe, but with pump prices above $4 a gallon for regular grade gasoline, voters are not impressed).

A Treasury secretary can’t run the government’s finances effectively once the market starts to see him as a liability. Paul O’Neill, who ran the Treasury under President George W. Bush, eventually lost his job for bringing into question the nation’s long-running strong dollar policy, along with other communication errors. Steven Mnuchin, who headed the Treasury in the first Trump administration, committed multiple gaffes, including accidentally triggering a panic with a December 2018 statement declaring that banks had "ample liquidity" at a time when no one had been worried about liquidity, and it was Mnuchin’s message that led investors to assume the opposite.

By comparison, Bessent’s errors go above and beyond just misspeaking, as they suggest sudden and unexpected policy changes for an institution that has long thrived on "regular and predictable" behavior.  As America’s self-described "top bond salesman," Bessent should know that  credibility is the most valuable asset in any sales position. At the moment, he’s lost the confidence of his mentor Druckenmiller and is at risk of losing the broader market as well. He needs an imminent course correction to prevent this embarrassing August from not only becoming his legacy, but from inflicting damage on the economy.

More From Bloomberg Opinion:

• Bessent’s Bond Moves Won’t Solve U.S. Fiscal Problems: Editorial

• Bessent Wasted No Time in Undermining the Fed: Jonathan Levin

• An Interventionist Treasury Meets a Passive Fed: Bill Dudley

This column reflects the personal views of the author and does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Jonathan Levin is a columnist focused on U.S. markets and economics. Previously, he worked as a Bloomberg journalist in the U.S., Brazil and Mexico. He is a CFA charterholder.

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