Treasury Secretary Scott Bessent intends to confront the market participants known as "bond vigilantes" who are driving up interest rates by selling U.S. Treasury bonds, according to a private sector economist familiar with his thinking. Bessent is concerned that institutional investors' continued sales of long-dated Treasury bonds will lower prices and push yields on the critical 10-year bond above 5%, a development that could stifle economic growth as the mid-term elections approach.
The 10-year Treasury yield is a benchmark for many consumer rates, including 30-year fixed-rate mortgages. A significant rise in these yields could impact housing affordability and broader economic activity.
Sources indicate that Bessent has devised a plan that could be implemented if interest rates continue to climb. This plan reportedly extends beyond the Treasury's recent purchase of $4 trillion in longer-dated bonds and might involve temporarily suspending the issuance of certain long-term debt instruments, such as the 20-year Treasury bond.
Bessent, a former hedge fund manager, understands the market dynamics at play. He views these potential interventions as necessary short-term measures to address the nation's debt challenges as the mid-term elections draw nearer. "Bond vigilantes" are described as market actors who seek to profit from perceived poor government policy by selling U.S. debt and placing negative bets on Treasurys, anticipating price declines.
This strategy comes as the total U.S. debt, including that held by the public and government accounts, has surpassed $40 trillion, with debt held by the public exceeding 100% of GDP. The financing needs for infrastructure, including those supporting artificial intelligence development, have also contributed to downward pressure on U.S. debt prices, consequently increasing yields on both 10-year and 30-year Treasury bonds.
Bessent faces a delicate situation, as bond vigilantes often react to policy interventions. He has also taken steps to support the Japanese yen to discourage Japanese holders of U.S. debt from selling their holdings.
The "bond vigilantes" contend that the U.S. is spending beyond its means and that pushing up yields compensates investors for the risk associated with the nation's debt load. Notably, Bessent himself has a history as a "currency vigilante," having profited from shorting the British pound in 1992.
While yields are currently elevated partly due to economic growth fueled by AI investments, and despite the absence of rampant inflation, borrowing costs are becoming a concern for the markets. Some market participants express apprehension over the rapid increase in national debt, which has grown from $8 trillion in 2000 to $40 trillion in 26 years. The private sector's need to raise trillions for technological buildouts adds to market pressures.
However, some factors may mitigate the situation. The yields, while high, are not unprecedented compared to historical levels, and U.S. assets are still perceived by investors as a safe haven. Furthermore, growing opposition to the construction of data centers, driven by local communities, could potentially slow down the buildout of AI infrastructure, which might provide some short-term relief for Treasury yields.