
The bond market can be tricky for even its most sophisticated and well-armed participants.
Just witness how Scott Bessent lately has attempted interventions to suppress interest rates — only to see them surge higher.
Mind you, I say this as an observer who appreciates our Treasury secretary’s bids to save the US economy from a potential credit chokehold that could spark a recession.
He’s working for a debt-ridden nation that faces higher borrowing costs across the board.
He also works for a president who has shown little internal fortitude to cut spending.
When he took over last year, the former hedge funder’s plan was classic supply-side economics: tackle the anemic growth and inflation of the Biden years by cutting taxes and slashing regulatory curbs on economic activity like drilling that usually benefits consumers.
But managing a $32 trillion economy with $40 trillion in debt isn’t simple.
Yes, inflation is lower than when Sleepy Joe and his equally inept Treasury Secretary Janet Yellen were running things.
But the Iran conflict and its impact on oil and gas prices have been stoking inflation fears and causing rates to rise.
Friday’s hot inflation number, my sources on Wall Street tells me, almost guarantees a Fed short-term “fed funds” rate hike later this month and probably one more later in the year.
AI’s borrowing mess
Already goosed by all of the above and Trump’s tariff agenda, longer-term rates controlled by traders lately have been climbing further because of the AI buildout.
AI was supposed to be a no-lose proposition, adding to GDP and wage growth for blue collar workers. Productivity gains were expected to suppress inflation and interest rates.
Instead, AI’s downside is what we are experiencing now: Data centers need capital that is vying for investor attention, raising the US government’s borrowing costs as it’s forced to pay higher rates to compete for buyers.
Meanwhile, there’s a lot riding on keeping interest rates stable.
The midterms are coming and higher rates on Treasury bonds, particularly the 10-year, means higher rates on everything from mortgages to credit cards that are priced off that security.
In response, Bessent has been turning to the Treasury Department’s slush fund to buy US government bonds.
As every student of Debt Trading 101 knows, a flurry of bond buying tends to increase bond prices, which move in the opposite direction from the interest rates they carry, known as yields.
Just last week, the Treasury announced plans to spend $6 billion on US bond repurchases to quell rates.
Yet instead of going down, yields have been surging to multiyear highs, crossing to 4.97% on the 10-year on Friday — perilously close to 5%, where many traders fear things could start to go haywire with the economy.
In other words, welcome to the wacky world of the bond market that Bessent should have seen coming.
Destined to fail
A little background: I cut my teeth as a financial reporter covering bonds.
While stocks grab far more attention from media and financial advisors, the bond market — with a notional value of some $160 trillion worldwide — is far more important to the plumbing of the US economy and even your pocketbook.
US Treasury bonds arguably are the key piece in the matrix.
They fund the US government and pay for our largesse.
They are a bellwether for consumer borrowing.
For years, interest rates were stable even as we ran huge deficits.
That was partly thanks to the Fed’s so-called quantitative easing — buying debt to keep rates low during the 2008 financial crisis and during COVID.
But you can’t keep doing QE forever because it stokes inflation like the horrible 9% stuff we had during the Biden years — a pernicious tax on working-class Americans who aren’t speculating on stocks.
Early in Trump’s term, inflation subsided but not enough.
Yes, the rate of price increases is down, but they’re still increasing.
Wage gains aren’t what most of us would like, and presto, rates are on the rise.
With that, Bessent is making his move. He must know it will fail because it always does.
Bessent was among those traders who bet against the British pound sterling back in the early 1990s when the Bank of England tried to intervene to stop a selloff.
He knew at the time that such interventions show the market — the so-called vigilantes — that they’re right. In lockstep, they redoubled their efforts to sell the targeted currency.
That’s what happened back then; the Brits were forced to devalue the pound, and Bessent made a fortune as a hedge-fund speculator.
The big question is, why doesn’t he see that now?

