Tracy Alloway and Will Sommer: A Cabinetful of Clueless Grifters

The Bulwark Daily

This episode of The Bulwark Daily features a deep dive into financial markets, focusing on Treasury Secretary Scott Besson's controversial announc

Key takeaways

Yield curve control attempts by the U.S. Treasury failed to sustainably lower long-term bond yields despite temporary market reactions.
The shift from central bank buyers to price-sensitive investors has increased volatility in U.S. Treasury markets, driving up yields.

Main topics

Yield curve control and U.S. Treasury market dynamics
Bond market liquidity and investor behavior

Notable quotes

Scott Besson, colon, yield curve control will never work. You gay pedo.

Conclusion

The episode underscores how financial markets and political extremism intersect

Transcript preview

Speaker 3 (0:13) Hello and welcome to the Bulwark Daily. I'm your host, Tim Miller. In segment one, we're going to be discussing yield curves and bond markets. And if such matters overheat your brain like they do mine, we're going to do our best to make it fun. And as a special bonus, like as a gift, in segment two, I'm bringing Will Summer on. And we're just going to discuss MAGA World craziness like it's a Bravo show. All right, so you'll get a little bit of brain dessert. in segment two. But first, help us navigate the world of Bon Vigilantes and Scott Besson stepping on rakes. I'm delighted to welcome back to the show the co-host of Bloomberg's Odd Lots podcast, Tracy Allaway. Hey, Tracy. Hey, Speaker 1 (0:49) how's it going? I love that my appearance here comes with a disclaimer. We might fry your brain, but it'll all be okay in the end. Speaker 3 (0:57) Yeah, it's like when Jason Calacanis comes on. I've got to do a big wind up to warm people up at the beginning. But surely the people love Tracy far more than Jason. I want to explain the impetus for you coming on. I was on social media and I saw a picture. And on this picture, it was a man. Looks like maybe like a 1950s beatnik kind of. He's in Asheville. He's carrying a walking stick. And he has a sign for passersby. And the sign says this. Scott Besson, colon, yield curve control will never work. You gay pedo. And I saw that sign. I was like, I think I'm interested in the message he's sending, but I don't understand it. And I've seen a number of other stories on this. And I was like, I need Tracy Alloway to come on and explain this sign to me. Like she is an Instagram finance influencer. And I'm a dummy trying to understand what's happening in the world. Can you do that? Speaker 1 (1:52) Man, I will do my best. The first thing I'll say is, you know that the bond market has become big news when protesters are holding actual signs, screaming about yield curve control, right? We've gone mainstream, finally. This is the moment I have lived for. Okay, so, I mean, where should I even begin? Let's see. The first thing you need to know is that... bond yields, so rates that are paid on U.S. government debt, reached a 19-year high recently, which basically means people are more reluctant to buy U.S. government debt and to finance the U.S. Treasury and all its spending than they have been previously. So there's a little bit of nervousness out there in the market. In general, governments do not really like their bond yields going up for seemingly no reason. And then Out of nowhere, we had Treasury Secretary Scott Besson come out and make this announcement saying that in the name of market liquidity, and we can get into what exactly that means, he was going to buy back even more treasury bonds and replace them with short-term debt. And his whole thinking, his rationale behind that was this magic word liquidity, which you can think of as ease of trading in the market or market functionality. But the weird thing was that the market, the U.S. Treasury market was pretty much functioning very normally on that day. And so what most people thought when they saw this announcement was that it's not that the Treasury market isn't functioning right. It's that the Treasury is uncomfortable with the current price of U.S. debt and they want to bring those yields down. Speaker 3 (3:30) And so the people that are buying the U.S. debt usually are what? Foreign? Banks, individuals, investors, like who is buying the debt? Speaker 1 (3:40) You named a bunch of them just then. But the interesting thing about the buying base for U.S. Treasuries is that it's changed quite a bit over the years. So it used to be, think about other central banks in the world, like your China and your maintaining stability of your currency. In order to do that, you have to buy U.S. Treasuries. And I'm sure. all your listeners have heard about this idea of China holding a big stockpile of U.S. treasuries. Speaker 2 (4:05) If Speaker 1 (4:06) you're a central bank managing your reserves or your currencies, you will be buying lots of treasuries. Now, alongside that, there's your normal investor, right? Everyone from you and me, if you have a treasury direct account to pension funds, insurers, hedge funds. What's really interesting about the treasury market in recent years is if you look at the proportion of the different... buyers in that buyer base, it's changed a lot. There are far fewer central banks, these big institutional holders that basically have to buy treasuries because of what they're doing with their own accounts. And there are a lot more what we call price sensitive investors. So think like hedge funds, private investors who are buying treasuries because they think it's a good investment, because they like the price. Now, what's happened because of that is that the price that they are asking for treasuries, the return for that investment has gone up. And so we've seen the rates on U.S. treasuries, the yields start to go up more. Basically, you used to have this pool of huge buyers who had to buy treasuries, and now you don't. Now you have to convince them that buying U.S. government debt is a good deal. And as a result of that, we've seen yields start to go up. Investors are saying, actually, this isn't such a good deal. unless I get a higher return in the form of those higher yields. All Speaker 3 (5:29) right. So for the brain fried out there, when you say the yield is higher, like what that means functionally for like regular people is that the interest rate that they're paying on debt is higher, right? So your mortgage rate is higher, your car interest rate is higher. Like that's what it means. Speaker 1 (5:48) That's right. And the interest rate that the US Treasury is paying to its borrowers. is higher. They have to pay more in order to get people to buy the debt. Speaker 3 (5:58) Got it. So back to the sign. yield curve control will never work. Is that true? Did it work? Did Scott Besson do anything for people by purchasing this debt? Speaker 1 (6:10) All right. So it's sort of mixed up here because Scott Besson is saying one thing. He's saying that he's doing this in order to improve the market functioning, market liquidity. Now, as I said, there were no signs when he announced this that the market was functioning in any disorderly way. It was a very normal. what some people would call a boring day in the treasury market, despite that spike in longer term yields, it had the effect, when he made the announcement, it had the effect of bringing longer term yields down for like two minutes. this lasted. But when people talk... Speaker 3 (6:47) So Speaker 1 (6:47) if you Speaker 3 (6:47) like in that two minutes, you wanted to get a 30 year mortgage, like you got a little bit better of a deal for like a half an afternoon. Speaker 1 (6:53) You got a lower rate, which is what the treasury wants to see. So people were encouraged to buy the debt. But on the other hand, so this is where yield curve control comes in. So you bring the longer term yields down and you, well, hopefully don't bring shorter term yields up, but you basically, you're trying to flatten the curve. Okay. Got it. This is the financing curve of the U.S. Treasury. That is yield curve control. However, as I said, by the next day, bond yields were up where they were before the announcement. And so it really doesn't seem to have worked in this particular timeframe, which is why presumably we've seen Scott Besson since come out and start talking about other things that the U.S. Treasury could do, like buy back even more debt, use the Treasury's reserve account. To do that, we had an incredibly amusing clip of President Trump who was asked about bond market intervention. And he basically said the final boss of bond market intervention is somehow military intervention, which I don't think anyone- The ultimate Speaker 3 (7:54) intervention is our military. And if we have to use that, we will. How would that work? Would that just be like, is there a guy in charge of the bond market? And we can just send the Marines in and put a gun to his head and be like, lower the yield. Lower the yield now. You'll Speaker 1 (8:10) be unsurprised to hear that there isn't. I am not aware of any president in the history of the United States who has threatened the bond market with military intervention if you take Trump's statement at face value, which, you know, I think mostly we should take Trump's statements at face value. So no idea how that's supposed to work. Speaker 3 (8:27) Hmm. Still James Carville quote. That he used to think that if he was reincarnated, he wanted to come back as president. But then he realized he wanted to come back as the bond market because the bond market can intimidate anybody, including presidents. And that's kind of like where we're at right now. I think Speaker 1 (8:42) every bond correspondent in history has at some point used that quote in a column. They have it sitting Speaker 3 (8:48) on their desk. Speaker 1 (8:48) Right. But the reason is it's true. There are plenty of governments out there that have been toppled by the bond market. if nothing else. And you think back, I mean, we have recent examples in the form of Liz Truss in the UK who got ousted after going through a bond market crisis. So it can happen. The bond market can be a scary thing for governments precisely because it's difficult to control. It's not impossible to influence, but it's very difficult to control. Speaker 3 (9:16) Okay, so Trump might send in the military, might send in the Marines to intimidate. I assume it'd be Jews in charge of the bond market. I don't know. I assume that's what he has in his head. But who knows what's happening in Trump's brain. Besson has a slightly more complicated plan, I guess, as of yesterday. This is Charlie Gasparino, Fox News business reporter. He wrote this. I'm just going to read it in full because it's hard for me to parse. Treasury Secretary Scott Besson will do whatever it takes to, quote, put the fear of God into the bond vigilantes. Shorting the long end of the curve in an attempt to drive the 10-year yield to 5%. Wall Street executives' direct knowledge of his thinking say that would include buyback, selling short-term debt, possible elimination of long-dated bonds like the 20-year, etc. It's a short-term solution to keep yields from soaring further. Strangling growth is the midterms approach, they say. Speaker 3 (10:03) Yeah. Speaker 1 (10:04) So we should be asking the question, why is this a priority for the Treasury Secretary at this particular moment in time? And the truth is that the Treasury market is the benchmark interest rate against which all others are judged. So mortgage rates are priced off of U.S. Treasuries. So if Treasury yields are spiking, those Treasury rates are going up. So is your mortgage rate. Right. Which is probably not what Republicans. want to see ahead of the midterms. There's also the question of the relationship between the stock market. So we have all these huge AI companies that are financing themselves, selling debt at really unprecedented rates. And their growth also depends on what U.S. treasuries are doing at the moment. They need to be able to fund themselves cheaply if they're going to keep growing, if stock prices are going to keep going up. so that Trump can still take credit for the stock market. So everything's kind of interrelated. What you don't want to see is a huge spike in bond yields that not only increases the Treasury's funding costs, but also starts making its way into, I guess, the popular mind in the form of higher mortgage rates and maybe a stock market dislocation. Speaker 3 (11:15) Yeah. The interesting part of that at the end was the strangling growth. Because the question is, okay, what are the actual ways to... get interest rates lower, right? I mean, if it looks like there are recession indicators, maybe the Fed will lower rates. Here's a crazy idea. I think we could probably issue less debt. It was something the Trump administration said was a priority at the beginning. They had a whole program around this called Doge that Elon Musk was supposed to be in charge of, where we're going to get our books more aligned. But that's it. Right. I mean, those are the options. Those are like the real options on the table besides the gimmicks. Speaker 1 (11:48) Policymakers are nothing if not creative. So there are a few more. All right. Speaker 3 (11:52) So, OK, Speaker 1 (11:52) if you are a government struggling with high debt, how do you get that debt down? OK, the easiest way is you grow your way. out of debt. You grow faster than your stock of debt is increasing. That sounds nice, but, you know, kind of hard to do. That's a Speaker 3 (12:07) great idea. But the problem, we are also doing tariffs. Yeah. I saw that we're rescinding a record number of visas for tourists and businesses from immigrants. Like we're doing a lot of things to stifle growth. Speaker 1 (12:19) Yeah. Speaker 3 (12:20) Simultaneously. So that option is a little challenging. There's a Speaker 1 (12:22) lot of cognitive dissonance, let's say, in some of these economic policies. So, okay, put growth aside. Like we're not going to do that. The second one is you could have higher inflation and you erode away the debt. All right. Like the value of $100 that you owe from 10 years ago is less than is a lot less than, you know, the value now. You just eroded away through high inflation. We know from the past six years experience that Americans really hate inflation. Trump was basically, you know, voted in because people seem to really hate inflation. So let's assume that we're not going to do that. The third way is actual fiscal consolidation. So reduce the debt, which you just pointed out. So raise taxes, lower spending, all that kind of basic stuff. Turns out that's politically unpopular too, right? People don't like to see entitlement programs that they've been paying into for years and years suddenly go away. So that's a tough one as well. And we've seen through things like the one big beautiful bill that Trump doesn't really seem that interested. in consolidating debt. And so you're left with, let's see, the fourth and final way, which is what we call financial repression. And this is stuff like yield curve control. It's stuff like finding ways to force investors to hold your debt at lower yields. And it can be anything from the yield curve control type stuff that we just described. to things like, you know, Scott Besson intervened in the Japanese yen recently. And as part of that, the way he did it was he intervened in the yen in a way that discouraged Japan from actually selling a bunch of its treasuries to protect its currency. Or it can be something like you tell the banks that they need to hold a bunch more treasuries to satisfy regulatory rules. So there's stuff like that that generally falls under the umbrella of financial repression that governments can do. The problem with that is someone is still losing out in that scenario. And it's usually, you know, investors, pension funds, people who aren't earning as high a return on their debt investments as they could be otherwise. But the reason that governments often like financial repression is because it's sort of politically nebulous. It's really hard if you're an average person on the street to say that, like, I am losing out because some bank has been forced to hold. more U.S. debt. It's much more, I guess, salient to you if you're living through high inflation or if your social security has been cut or something like that. Speaker 3 (14:58) So this is now way out of my depth. I was texting my father this morning. He knows about this stuff. So I had some dad questions. So I'm coming to you. And this is what is that related to kind of the redemption issue with private credit? Is that like this, this idea that, you know, investors like have restrictions now on how much they can redeem? Is that better? Is that a different thing? Speaker 1 (15:18)