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Over and over again, Treasury Secretary Scott Bessent keeps warning investors that he’s going to burn them.
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Whether they’re bidding up the price of oil, pushing down the Japanese yen or, most importantly, driving up United States Treasury yields, they’re making a big mistake, he insists, because he’s on the other side of the trade, armed with valuable information on government policy plans they don’t possess.
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In the jargon of game theory, it’s called asymmetric information, as the former hedge-fund trader is fond of pointing out. He’s uttered it publicly at least four times in the past three weeks alone, including Tuesday, when he dared currency traders to “bet against me if you want.”
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They’re starting to — at least in the bond and oil markets, if not yet in the yen market, where the U.S. has come rushing to the aid of Japanese officials.
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Since Bessent began jawboning those first two markets, both of which are crucial to the welfare of American households ahead of key mid-term elections, they have gone against him.
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Benchmark oil has jumped over US$100 a barrel, pushing gasoline higher at the pump. And on Wednesday, after he rolled out his first amped-up bond buyback in a bid to push down benchmark 10-year Treasury yields — which set the baseline rate for mortgage loans and other types of borrowing — they shot up instead, extending a two-week selloff that sent them to a fresh three-year high of 4.85 per cent.
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Those selloffs have, in turn, exposed the danger inherent to Bessent’s approach, which mirrors that of his boss, President Donald Trump. Verbal interventions only work as long as traders have faith they’ll be backed up by measures strong enough to keep overwhelming the market. And when it comes to perhaps the two most critical factors nudging bond yields and oil higher — the United States budget deficit and the war in Iran — Bessent has limited influence.
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“The market has called his bluff,” said Mark Spindel, founder and chief investment officer at Potomac River Capital. He said the massive federal deficit, coupled with concerns about the Federal Reserve’s ability to tame inflation, are overshadowing Bessent’s manoeuvres. “Those are all issues that I think weigh more heavily on the market, notwithstanding Bessent’s bravado,” he said.
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Governments have staged plenty of successful interventions over the years.
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The so-called Plaza Accord in the 1980s pulled down the U.S. dollar against other currencies. A faltering effort by European authorities to stabilize the euro after the Global Financial Crisis eventually worked in 2012 once the European Central Bank president vowed to do “whatever it takes.” Japan successfully deployed yield-curve control for years. But such forays have often been backed by central banks with virtually unlimited power to keep pushing markets their way, making it dangerous to bet against them.
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Bessent’s tools are far more limited. He’s boxed in by the Trump administration’s nearly US$2 trillion deficit and the Iran war’s energy shock, both of which have been driving U.S. bond yields higher and higher over the past six months.