Fed, Treasury clash over Bessent long-term bond buys

Treasury Secretary Scott Bessent announced last week the Treasury will at least double purchases of longer-dated U.S. government bonds to push down mortgage rates and other long-term borrowing costs after yields rose to near two-decade highs.

The Treasury plans to increase buybacks of long-term Treasuries to at least $4 billion. Officials say the program aims to reduce financing costs for households and businesses.

Investors and money managers warned the purchases could complicate the Federal Reserve’s effort to bring inflation back to its 2% target. Inflation currently stands at 3.7%, and market participants point to rising yields, larger government borrowing needs and heavy debt issuance tied to investment in artificial intelligence infrastructure as factors behind higher long-term rates.

Market participants note the Federal Reserve monitors longer-term yields among other indicators when assessing whether to raise interest rates to cool demand.

Greg Peters, co-chief investment officer at PGIM Credit, expressed skepticism toward the Treasury plan, asserting, ‘I have a very dim view of the Treasury’s rationale.’ Lisa Shalett, chief investment officer at Morgan Stanley Wealth Management, cautioned that direct efforts to influence yields could prompt concerns about Washington intervening in the bond market.

Investors will look for guidance from Federal Reserve Chair Kevin Warsh at the Kansas City Fed’s annual Jackson Hole conference to see how the central bank views the Treasury’s actions.

At the Fed’s July meeting three members of the Federal Open Market Committee voted for a rate increase, and several regional presidents have since signaled they could support a quarter-point hike, indicating some officials remain open to further tightening.

Bessent and Warsh are both protégés of investor Stanley Druckenmiller. Druckenmiller criticized plans to boost long-term buybacks, calling them ‘a mistake’ and arguing the purchases amount to managing bond prices rather than supplying liquidity.

Some investors have also flagged political timing, noting the administration has an incentive to lower borrowing costs ahead of the midterm elections. Markets will monitor any further Treasury detail on the scope and timing of purchases and upcoming Fed remarks for implications on mortgage rates, government borrowing costs and the central bank’s policy path.