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After months of verbal commitments to remain in the system, the UK government exited the European Exchange Rate Mechanism on September 16 1992, unchaining sterling from other EU currencies. “Black Wednesday” harmed the credibility of the government, and netted investors who bet against the pound large returns. Among them was a young American trader at Soros Fund Management in London: Scott Bessent.
Today, the US Treasury secretary finds himself on the other side of the table. Rather than maintaining a currency peg, Bessent must bolster the world’s most important bond market as Treasuries face a moment of weakness.
Bessent likes to describe his role as America’s “top bond salesman.” Implicit is a desire to keep bond prices high and rates low. But his recent attempts to tame Treasuries have not addressed the underlying drivers of turbulence in the US bond market. As Bessent surely knows from his experience with John Major’s government, interventions only work insofar as policymakers have credibility in the eyes of markets.
Treasury market fragility has grown in recent years due to persistent US fiscal deficits driven by high spending and tax cuts. Elevated interest rates have exacerbated the problem of servicing Treasury debt. The typical Treasury bond purchaser is shifting from buy-and-hold sovereign buyers, pension funds and insurers to hot money that demands higher rates. High capital spending on AI data centres contributes to a bond glut in which sovereign issuers are competing with corporate borrowers and private credit, pushing up rates.
Bessent’s interventions have aimed to reduce upward pressure on long-term Treasury yields. The move to support a weak yen this month was intended to take pressure off Japan to raise rates or sell Treasury bonds to support its currency; both could weaken the dollar and push up US government borrowing costs. Earlier this year, Bessent suggested providing swap lines to Gulf countries such as the United Arab Emirates, also major holders of Treasury debt. Supporting the currencies and liquidity positions of foreign allies to avoid Treasury sell-offs is a temporary fix, but does not solve the problems of policy credibility and excess debt.
Last week, Bessent made unusual changes to policy towards the Treasury market, signalling that his department would buy twice as many long-dated bonds. Bessent has been a critic of the US Treasury’s “regular and predictable” posture on bond maturity issuance, blaming Janet Yellen for not issuing enough longer-maturity debt and leaning on short-term borrowing. His intervention last week boosted long-term bonds on the day, but its modest scale ultimately left the market mostly unchanged. Reports on Monday indicated the Treasury may use funds from its main checking account to buy back bonds, but the scope of such a programme remains to be seen.
As the steward of the world’s most important bond market, and a key player in maintaining the world’s reserve currency, Bessent’s interventions affect the global economy. His efforts have not been helped by the reluctance of the new Federal Reserve chair Kevin Warsh to communicate his views clearly.
But Bessent’s actions so far amount to putting bandages on deeper wounds caused by structurally high deficits and persistent inflation. The only sustainable way to reduce upward pressure on Treasuries would be fiscal prudence. Bessent has highlighted his desire to limit budget deficits to 3 per cent of GDP, roughly half the current deficit. He would do well to push the Trump administration and Congress to achieve this stated goal.
