Treasury plays the hand it’s dealt

Treasury Secretary Bessent is actively intervening to cap rising long-term interest rates. He's doubling long-term Treasury buybacks, funded by more bill issuance, essentially creating a US version of "Operation Twist."

This move aims to lower borrowing costs but has had little lasting impact so far. The market's initial reaction faded as large deficits and significant debt issuance persist. Geopolitical risks and competition for capital from corporations also complicate efforts to lower yields.

The Fed faces a dilemma; expanding its balance sheet to control the yield curve contradicts its plan to shrink it. Furthermore, aggressive rate cuts without fiscal improvements could even boost long-term yields by signaling inflation. Bessent's "3-3-3" plan targets growth, deficits, and energy production, but a credible path to achieving these goals remains unclear. Durable lower yields likely require lower inflation, smaller deficits, and sustained growth, not just adjustments to Treasury issuance.