Why Scott Bessent cannot easily push Treasury yields lower

The Treasury tried to move long-term yields, but the market pushed back

Scott Bessent has spent much of his tenure arguing that U.S. borrowing costs are higher than economic fundamentals justify. Last week, the Treasury Secretary tried to do something about it.

The Treasury announced larger buybacks of longer-dated government debt, funded indirectly through greater issuance at the short end of the curve. Bessent described the strategy as a “Treasury twist,” a reference to the 1960s Operation Twist framework that sought to influence the shape of the yield curve by changing the maturity composition of government securities.

The market initially responded exactly as Bessent wanted. Long-term Treasury yields dropped sharply after the announcement.

The effect did not last.

The 10-year yield finished the week near 4.73%, close to its highest level since Bessent took office, while long-duration borrowing costs remained elevated across the curve.

That quick reversal exposed the central problem with the strategy. The Treasury can influence the supply of bonds at individual maturities, but it cannot easily overpower the much larger forces currently determining the global price of capital.

What Bessent is trying to do with the “Treasury twist”

The basic idea is relatively simple.

By buying back some longer-maturity Treasuries, the government removes duration from the market. If fewer long bonds are available, their prices should receive support and yields should fall, all else equal.

Treasury can then issue more short-term bills to fund those operations.

The approach effectively changes the composition of government borrowing without materially changing the overall quantity of debt.

That distinction matters.

A large fiscal deficit still has to be financed. Treasury is not eliminating borrowing needs. It is shifting some of the pressure from one part of the yield curve to another.

In theory, this can improve liquidity in older or less actively traded securities and reduce pressure on long-term yields. In practice, it works best when supply composition is the primary problem.

Today, that may not be the case.

The bigger problem is the amount of debt

U.S. government debt has now surpassed $40 trillion, while annual deficits remain exceptionally large.

The fiscal deficit is projected at roughly 6% of GDP this year, an unusually high level for an economy that is not in recession.

That means investors know large Treasury issuance is not a temporary phenomenon.

The government must finance current spending, refinance maturing securities and pay a rapidly increasing interest bill. Federal interest costs are already running well above $1 trillion per year.

This is the backdrop against which Bessent wants long-term yields to fall.

The challenge is obvious. Investors are being asked to absorb enormous quantities of debt at the same time that the government's future financing requirements remain uncertain.

Changing the maturity mix can affect where the pressure appears. It does not remove the underlying supply.

The bond market may not believe yields are unusually high

Bessent has described current Treasury yields as being out of line with equilibrium levels.

Not everyone agrees.

One alternative view is that interest rates between roughly 4% and 5% are much closer to historical normality than the ultra-low rates investors became accustomed to after the Global Financial Crisis.

That argument matters because the Treasury's ability to push yields lower depends partly on whether the market sees current rates as a temporary distortion or as appropriate compensation for risk.

Investors today must consider large deficits, inflation uncertainty, heavy issuance and competition from private borrowers. Against that backdrop, a 10-year Treasury yield near 4.7% may not look obviously excessive.

The Treasury can send a signal through buybacks.

The market ultimately decides whether that signal is strong enough to change the required return.

AI is competing with Washington for the same capital

Government borrowing is only one side of the equation.

The artificial intelligence investment boom is producing enormous financing needs across the private sector as well.

Hyperscalers and infrastructure companies are issuing long-duration debt to finance data centers, electricity generation, networking equipment and other AI-related investment. Alphabet recently sold bonds with maturities extending as far as 40 years.

This matters because Treasury does not borrow in isolation.

Every dollar directed toward a corporate bond is a dollar that could otherwise have been invested in government debt.

Bessent himself has acknowledged that AI investment is creating a short-term competition for capital, even if he expects those investments eventually to improve productivity and generate stronger non-inflationary growth.

His suggestion to corporate chief financial officers has been straightforward: issue more debt in the middle of the curve, around five-year maturities, rather than competing aggressively with the Treasury for long-duration buyers.

That reveals how unusual the current environment has become.

The Treasury Secretary is not only managing government debt issuance. He is openly discussing how major corporations should structure their borrowing to reduce pressure on the same yield curve.

Why global yields are rising too

Another problem for the argument that U.S. Treasury yields are uniquely distorted is that long-term borrowing costs have risen across several developed markets.

Government bond yields in Japan, Germany and the United Kingdom have also reached levels not seen in years.

The common thread is familiar: higher debt issuance, persistent inflation risk and governments asking investors to absorb much larger quantities of bonds.

That makes the rise in U.S. yields partly a global phenomenon.

Capital is mobile. An investor considering a 10-year Treasury compares it not only with U.S. equities and corporate bonds, but also with sovereign debt overseas.

As yields rise elsewhere, Treasury must remain sufficiently attractive to compete.

This puts another limit on how much any Treasury buyback program can achieve on its own.

Inflation remains outside Bessent's control

Inflation is another major constraint.

Higher energy costs have complicated the inflation outlook this year, while uncertainty around Federal Reserve policy has increased the premium investors demand for holding longer-duration bonds.

Bessent can change the quantity and maturity of Treasury securities in circulation.

He cannot dictate inflation expectations.

If investors believe inflation will remain persistent, they will continue demanding compensation through higher nominal yields. If they become less confident about the Fed's inflation framework, the required term premium can rise further.

This is one reason buybacks can produce only limited relief if the underlying inflation and policy backdrop remains uncertain.

The Treasury can influence market plumbing.

It cannot set the market's inflation forecast.

Bessent's hardest option is the one markets would trust most

The most durable path toward lower long-term yields is also the politically hardest one: a smaller fiscal deficit.

Reducing borrowing needs would directly address the supply problem. Fewer new Treasuries would need to be absorbed, and investors could demand less compensation for fiscal uncertainty.

Yet achieving a material reduction is difficult.

Social Security, Medicare and Medicaid account for a large portion of federal spending, while debt-service costs continue rising. Large cuts to entitlement programs are politically challenging, particularly around an election cycle.

The administration has discussed additional fraud reduction, lower transfers to states and other spending measures. Previous efforts to generate large savings have fallen short of their initial projections.

This is why market skepticism remains elevated.

Small changes in discretionary spending are unlikely to materially alter a deficit running near 6% of GDP.

Bond investors tend to respond to arithmetic more than rhetoric.

The three routes to materially lower yields are all uncomfortable

There are several plausible ways long-term yields could fall substantially, but none is particularly attractive.

The first is meaningful fiscal consolidation. That would reduce government borrowing and Treasury supply.

The second is weaker economic growth or a sharp equity-market decline. Such an event would likely produce a flight into government bonds and reduce private-sector demand for capital.

The third is a slowdown in AI investment, which would reduce corporate bond issuance and competition for long-duration funding.

Each route lowers yields by removing one source of capital demand or increasing demand for safe assets.

The problem is that the administration does not necessarily want any of them.

It wants strong equity markets, rapid AI investment and sustained economic growth while simultaneously pushing long-term borrowing costs lower.

Those objectives can coexist under some conditions, but not easily when fiscal deficits are large.

Is there really a “Bessent put” for bonds?

The Treasury Secretary's willingness to intervene more actively in debt management has led some market participants to ask whether a “Bessent put” is developing.

The phrase echoes the old belief that the Federal Reserve would step in whenever equity markets experienced severe losses.

For bonds, the idea would be that Bessent uses Treasury buybacks, changes in issuance and other debt-management tools to prevent yields from rising too far.

There is an important limitation.

The Treasury does not have the same balance-sheet power as the Federal Reserve.

Buybacks must ultimately be funded through other borrowing or fiscal resources. The Treasury can alter supply across maturities, but it cannot create unlimited demand for securities.

The Fed can.

That is why Treasury intervention is more effective as a signal or liquidity tool than as a permanent yield-control mechanism.

The Treasury and Fed may be pulling in different directions

The situation is made more interesting by the apparent difference in tone between Bessent and Fed Chair Kevin Warsh.

Bessent has suggested that long-term yields are too high and has actively used debt-management tools to influence them.

Warsh has sounded more accepting of the market move.

Following the July Fed meeting, he acknowledged that financial markets had already tightened conditions significantly and suggested that market prices would continue adjusting as investors saw fit.

That creates an unusual policy contrast.

The Treasury appears uncomfortable with how high yields have moved.

The Fed appears more willing to let the bond market impose tighter financial conditions.

For investors, that distinction matters because sustainable yield suppression normally requires coordination between fiscal and monetary authorities, especially if the move is intended to overcome powerful market forces.

Could the Fed solve the problem through QE?

If policymakers genuinely wanted to force long-term yields materially lower, Federal Reserve asset purchases would be a much more powerful tool.

Quantitative easing allows the Fed to create reserves and purchase Treasuries directly, removing duration from private markets on a scale the Treasury cannot replicate through buybacks alone.

But both Bessent and Warsh have historically criticized sustained QE.

Warsh opposed aggressive balance-sheet expansion during his previous time at the Federal Reserve and has continued arguing for a smaller central-bank footprint. Bessent has also criticized repeated reliance on Fed bond purchases.

That makes a return to large-scale QE difficult to reconcile with their stated policy preferences.

It also explains why investors remain the ultimate force determining the yield curve.

If the Treasury will not materially reduce deficits and the Fed will not absorb large quantities of long-duration bonds, yields must rise or fall until private buyers decide the compensation is sufficient.

Treasury buybacks can help liquidity, not erase fiscal risk

There is still a legitimate role for the buyback program.

Older Treasury securities can become less liquid than newer benchmark issues. Buying them back can improve market functioning, reduce liquidity premiums and make the overall debt market easier to trade.

That can modestly reduce borrowing costs.

But there is a major difference between improving liquidity and suppressing yields.

The latest market reaction illustrates it clearly.

Long yields fell when the new buyback approach was announced, but the decline quickly reversed. The 10-year Treasury finished the week near 4.73% because investors returned their attention to deficits, inflation, issuance and capital demand.

Those are much larger forces.

Buybacks work best as market maintenance.

Using them as a substitute for fiscal adjustment is much more difficult.

Why 4.7% may remain difficult to break

For long-term yields to decline sustainably, one or more components of the current equilibrium probably needs to change.

Inflation expectations could fall further.

Economic growth could weaken.

Treasury issuance could slow.

AI-related borrowing could moderate.

The Fed could begin purchasing longer-duration bonds.

Or investors could simply decide that current yields offer enough compensation to absorb significantly more supply.

Without one of those shifts, the 10-year Treasury may remain structurally elevated.

This is why the quick failure of the initial “Treasury twist” rally matters.

It suggests investors are not treating the current yield level as a simple technical dislocation.

They are treating it as the price required to clear a market facing exceptional demand for capital.

Why Bessent's Treasury twist cannot solve the long-term yield problem

Scott Bessent has meaningful influence over the Treasury market, but there are clear limits to that influence.

He can change the maturity composition of issuance. He can buy back less-liquid long-term bonds. He can encourage corporations to borrow at different points on the curve. Those measures may improve liquidity and temporarily reduce pressure on selected maturities.

What he cannot directly control is the combination currently keeping yields elevated.

U.S. debt has surpassed $40 trillion. The deficit remains near 6% of GDP. Federal interest expense exceeds $1 trillion annually. AI companies are competing aggressively for the same pool of long-term capital, while inflation and Federal Reserve policy remain uncertain.

That is why the 10-year yield returned to roughly 4.73% after the initial relief rally.

The bond market is not simply reacting to poor Treasury debt management. It is pricing the amount of capital the government and private sector are trying to raise.

Bessent can rearrange the supply.

Unless the deficit, inflation outlook or competition for capital changes, investors will continue deciding the price.