It’s the Debt, Stupid

National Review Online

Monday, August 31, 2026

 

A heavily indebted debtor is not well-advised to be seen to play games with his creditors, and that was what Treasury Secretary Scott Bessent was widely perceived to have done a couple weeks ago. Yields on 30-year Treasuries had been trending up for some time and had reached 5.33 percent, their highest level since 2001 (a number worth watching by mortgage borrowers too). And so the Treasury announced (choosing unusual timing given the refunding cycle) that it would be buying longer bonds with short-term maturities. This only had a brief effect on the 30-years. It took a second announcement doubling the size of the proposed buyback to make a somewhat more lasting dent, possibly helped by a slight easing of oil prices. The yield on the 30-years is around 5.19 now. Was the Treasury playing games in order to nudge long-term rates down a little?

 

Quite a few thought so, including, awkwardly, Stanley Druckenmiller, a billionaire investor who was once a mentor to Bessent. He dismissed the Treasury’s argument that this was nothing more than “liquidity management.” Rather, he argued, the Treasury was undertaking price management, something very different. As Friedrich Hayek argued years ago, monkeying around with prices rarely ends well.

 

Adding to suspicions that this might have been going on were the president’s well-known views on interest rates, doubtless sharpened by the upcoming midterms. Memories were also fresh of the Treasury’s intervention (using euros) in support of the ailing yen at the end of July. This had raised eyebrows, as the U.S. rarely intervenes to support a foreign currency. The last time the Treasury was involved in propping up the yen was during the Asian financial crisis, although it did try to help cap the rise in the Japanese currency after the Fukushima disaster (when there had been expectations that a lot of money would return to Japan).

 

Bessent later tied the Treasury’s most recent intervention to fears of the “forced unwinds” (of financial positions) that could be triggered by disorderly yen markets. This could “destabilize global markets and ultimately raise borrowing costs for American families and businesses.” He also noted, among other matters, that Japan is a “major holder of U.S. Treasuries.” Those are not unreasonable arguments, and far from underhanded, although Bessent might have been franker (if, perhaps, too frank) to specify that among those borrowers about whom he was concerned was Uncle Sam. In 2025, interest expense amounted to 15 percent of federal spending, a number that is set to be boosted further by persistent deficits, the dark magic of compounding, and the higher interest rates that those facts all call for. Any difference that the cost of AI-related borrowing may be making to rates may be a nice excuse, but any effect is probably at the margin. One thing, however, that is as close to certain as anything can be is that the low interest rates of the previous decade are gone for the foreseeable future. Another is that the reversal of anything that was left of the peace dividend has further to go.

 

The unfortunate reality is that so long as the U.S. keeps piling up more debt, there is only so much that clever maneuvers can do to ease the costs and vulnerabilities that go with it. Creditors won’t take any positive effect of the proposed buybacks on yields as an indication of better times to come and, worse still, may well regard them as a warning sign. Their effect won’t last for long and will be outweighed by inflation concerns, as, indeed, Fed Chairman Kevin Warsh is clearly signaling. It was telling that his hawkish words did more to discourage gold bulls (for now) than Bessent’s buyback plans.

 

To be clear (not that it should be necessary), a failure to be seen as taking inflation seriously would in due course be expected to push yields higher: Investors tend to put a higher sticker price for lending to a depreciating currency, and, adding to the pressure, more of the marginal buyers appear to be moving speculative funds quicker than in the past.

 

One way or another, the debt, starting with the deficit, has to be tamed.