Scott Bessent should stop blaming the bond market

For that he would need a much bigger stick. Since Mr Bessent’s mid-August announcement the yield on ten-year Treasury bonds has jumped from 4.65% to over 5%, its highest since 2007. And no wonder considering Mr Bessent’s twig-like intervention. America’s gross government debt is $40trn, about 10,000 times the size of each buyback. It is a bit like going to a bank that has lent you $1m, slapping a couple of $100 bills on the counter, eye-balling the clerk and demanding a lower rate.

The intervention is not just failing on its own terms: it also relies on a diagnosis that is plain wrong. The bond market, in Mr Bessent’s telling, is suffering from a “fever” stoked by speculators, pushing America’s borrowing cost above its rightful equilibrium level. In other words, trading has become dysfunctional and bondholders are not pricing Treasuries according to their fundamentals. In fact, the bond market is working precisely as it should.

Dysfunctional government-bond markets are not hard to spot. These assets are so important to the financial system that, when trading in them seizes up, other things are sure to start breaking, too. That was why, for example, the Federal Reserve bought Treasuries in early 2020 as covid-19 shuttered economies, companies dashed for cash and prices of these supposedly safe bonds cratered. It was also why the Bank of England backstopped Britain’s sovereign-debt market in 2022, after a spectacularly silly government budget sent yields soaring and imperilled the nation’s pension funds.

In contrast, far from having broken down, today the market for Treasury bonds is not even showing much stress. On September 10th America auctioned off $22bn-worth of new 30-year Treasuries at a yield of 5.3%. Traders made bids for more than two-and-a-half times that amount—a ratio that CME Group noted was at the upper end of the range for similar recent auctions. The exchange pointed out that non-dealers accounted for 98% of competitive bids, “suggesting excellent investor interest, presumably reflecting the recent rise in yields”.

True, that recent rise has carried American borrowing costs to their highest in nearly 20 years. But it was the low-rate 2010s that were odd. By pre-2007 standards today’s yields would look perfectly normal. Over the decade before that the ten-year Treasury yield averaged 5% and the 30-year averaged 5.4%.

Other gauges of market strain tell a similar story. If bondholders were panicking that Uncle Sam might default, they would insure themselves against this. Yet premiums for credit-default swaps, derivative contracts which do just that, suggest few are clamouring for them. If traders were worried that bond-market dysfunction might send yields swinging wildly, they would bake this expected volatility into options contracts. Yet the MOVE index, which measures such expectations, is far lower than it was a few years ago when post-pandemic inflation soared.

If anything, it is remarkable how smoothly the market is functioning. There are two big problems with Treasuries, and the main one is that America is issuing far too many of them. With one month left in this fiscal year, the Congressional Budget Office reckons the government has already borrowed nearly $2trn, or 6.3% of GDP. The other big problem is that it is doing so while pursuing policies, from tariffs to war in Iran, that push up inflation and so devalue the bonds it has already sold. Investors’ response—demanding higher returns—shows the market is working.

Mr Bessent’s problem is that this rational pricing of America’s debt, applied to the vast pile it has issued, makes his interest bill increasingly intolerable. His best option is to slow the pace of borrowing. But if he instead wants to batter bondholders into submission, he had better start hunting for a giant redwood to chop down.