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How Bessent Could Try To Push Treasury Yields Lower The Treasury market is becoming the central pressure point of the cycle. With the 10 year above 5% and bond volatility elevated, the issue is whether policymakers can keep Treasury financing orderly while inflation, massive borrowing needs and weakening private activity pull in opposite directions. The Real Constraint The problem is increasingly the price investors demand to hold long duration. High real yields, heavy issuance, fiscal uncertainty and elevated term premium are all contributing. The persistent diesel and refined product shock makes this harder because higher rates cannot create refinery capacity or restore disrupted shipping routes. The Fed can suppress demand, but it risks damaging housing, credit and employment before fixing the inflation source. What Treasury Can Do Bessent can reduce the duration private markets must absorb through • More Treasury bill issuance • Expanded buybacks of longer dated securities • TGA cash management and possible repo support • Adjustments to auction sizes and reopenings Bill heavy financing reduces duration supply today but shifts refinancing risk back toward the government. Regulators can also improve the ability of banks and dealers to hold Treasuries through leverage relief, collateral treatment and central clearing. The Dollar Shortage Path Another route could create a powerful Treasury bid even at the expense of the broader economy. The Fed and Treasury would not need to openly engineer a dollar shortage. They could simply maintain conditions that increasingly produce one. The Fed keeps short rates restrictive and avoids aggressively expanding dollar liquidity while Treasury continues heavy bill issuance and periodically rebuilds its cash balance. Then an external shock accelerates the process • European banking or sovereign stress • A Japanese carry trade unwind • Emerging market currency pressure • A global credit event • Geopolitical escalation As dollar liabilities become harder to fund, investors reduce leverage, sell risk assets and seek liquidity. If the shock damages growth faster than it raises inflation expectations, Treasury demand can eventually surge and pull long yields lower. But the sequence matters. A dollar shortage can initially cause Treasury selling as foreign central banks, funds and corporations liquidate their most liquid assets for dollars. The larger Treasury rally usually comes later. First comes dollar scarcity, deleveraging and volatility. Then policymakers provide repo liquidity, swap lines or collateral support without necessarily cutting rates aggressively. Once forced selling is contained, weakening growth can create the safe haven bid into Treasuries. If The Market Breaks If auctions repeatedly weaken, dealer capacity tightens and market functioning deteriorates, policymakers gain more justification for • Expanded repo support • Regulatory relief • Targeted Treasury purchases • Operation Twist style maturity transformation Explicit yield curve control would remain a last resort because defending a ceiling during persistent inflation could require enormous intervention. The Most Likely Strategy Bessent does not necessarily need to force yields lower directly. The more plausible strategy is to reduce duration supply, improve dealer financing, strengthen institutional demand and tolerate restrictive dollar conditions while waiting for weaker domestic and global growth to create the bond rally. The danger is that Treasury yields may eventually fall because the economy and financial system deteriorate badly enough to create their own demand for safety. That is the late cycle tradeoff Preserve the Treasury market by allowing financial conditions to become restrictive enough that the economy eventually creates its own Treasury bid.

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