Bessent's Treasury Vision
Four key takeaways from his Bloomberg interview.
New US Treasury Secretary Scott Bessent comes to the role with an extensive CV. He served as CIO for Soros Fund Management from 2011 to 2015 and later founded Key Square Group, a global macro investment firm, in 2015.
Yet it’s his current role as Treasury Sec that has the potential to be his defining legacy as he looks to pull on different levers to boost economic growth under the new President.
On Thursday, he gave an extensive interview on Bloomberg, providing some key takeaways for fixed-income traders and anyone who uses a macro compass to influence investment decisions. Here are some of the key points we noted.
Hardly Shifting From Yellen’s Stance
Bessent has previously criticized former Secretary Janet Yellen's debt issuance strategy, particularly her approach to increasing the share of short-term debt in the US debt portfolio. He hinted that this was done to boost the economy before the election, without having a long-term vision to solve for potentially artificially holding down long-term yields.
So you’d expect him to make changes to issuance straight away, pushing out longer-dated Treasuries, right?
Well, despite his earlier criticisms, Bessent has indicated that any shift toward issuing longer-term Treasuries is “a long way off,” suggesting a continuation of the current strategy for the time being. He tried to justify it slightly on Thursday by saying that “the previous administration shortened some of the duration, and we haven’t shortened it further.” That’s like saying you copied someone’s homework but the person you copied it from also copied it.
On a more serious note, it highlights to us that he acknowledges the complexities of altering the existing debt issuance framework. This leads us to…
Tussling With The Fed
Bessent discussed how increasing long-dated issuance would take a long time, with one of the key factors being the Fed’s current QT program. He specifically spoke about this hurdle, citing that it would be ‘easier for me to extend duration when I’m not competing with another big seller (i.e the Fed)’.
Let’s briefly run through what he’s talking about here.
The Fed, which had been a major buyer of long-term Treasuries during quantitative easing (QE), is no longer purchasing them. Instead, it is actively shrinking its holdings via QT. The QE/QT pivot can be seen with the Fed balance sheet below (just highlighting Treasuries) from 2019 to present day:
If the Fed isn’t buying, private investors have to absorb a much larger supply, and any limit on buying puts pressure on Treasury prices falling, with yields rising in the process.