Stanley Druckenmiller Leads Doubters of Bessent's Bond Market Strategies

Treasury Secretary Scott Bessent's recent actions in the bond market have led to a slight decrease in yields, but they have also drawn significant criticism from those who believe these measures will not be sustainable in the long term and could carry substantial risks.

The financial industry has largely expressed skepticism about the Treasury's capacity to effectively manage the fixed-income market, especially considering the projected issuance of approximately $4.7 trillion in debt for 2025, a figure that could potentially be surpassed this year.

Bessent has proposed a strategy to at least double the Treasury's efforts in repurchasing longer-dated debt. Furthermore, the Treasury intervened in currency markets in late July to support the yen, aiming to prevent the Bank of Japan from selling U.S. Treasurys, a move that would likely have increased yields on American debt.

While these interventions have temporarily pushed longer-dated yields away from their highest levels since before the 2008 global financial crisis, market experts are increasingly viewing these actions as ultimately futile. This is particularly true if the U.S. does not address its fiscal challenges, with total national debt recently exceeding $40 trillion and the budget deficit projected to surpass $2 trillion for 2026.

The latest prominent critic to voice concerns is Stanley Druckenmiller, the influential head of Duquesne Family Office and, notably, Bessent's former investing mentor. Druckenmiller, along with George Soros, famously profited from betting against the British pound in the early 1990s.

Druckenmiller has cautioned that without fiscal discipline, attempts to artificially lower yields pose significant dangers to both financial markets and the credibility of the Treasury Department.

"If the 30-year must trade at 5.5% to clear, that isn't a crisis. It is an invoice," he stated in an opinion piece for The Wall Street Journal. "Then do the only thing that durably lowers long-term yields: address the primary deficit."

'A subsidy to procrastination'

In his essay, titled "Let the Bond Market Speak," Druckenmiller urged Bessent to abandon the announced buyback program and allow the market to freely determine the appropriate price for government debt.

"Every basis point of artificial yield suppression is a subsidy to procrastination," he wrote. "Once markets believe Treasury is defending a price, every rise in yields becomes a test of official resolve, and the operations must grow to survive the tests."

"Governments defending prices against fundamentals always lose. The only variable is how much they spend before conceding," he added.

The Treasury Department did not immediately respond to a request for comment from CNBC regarding Druckenmiller's article.

Bessent's initial plan involved doubling the Treasury's typical $2 billion buybacks of previously issued securities, a program that began two years ago under his predecessor, Janet Yellen.

Additionally, sources informed CNBC this week that the Treasury might also utilize its $935 billion general account to finance fixed-income purchases.

However, skepticism remains that even this measure would be sufficient. The general account functions as the Treasury's operational checking account and has been used during debt ceiling negotiations, implying it has limitations.

These recent actions have drawn comparisons to strategies employed by the Federal Reserve in the past to inject liquidity into debt markets and stabilize interest rates, such as "Operation Twist" (selling short-term debt and buying long-term securities) and quantitative easing (purchasing fixed income with its own reserves).

The key difference is that the Fed, unlike the Treasury, is not constrained by a finite cash balance and can create reserves to fund its purchases.

The Fed's position

"If the U.S. government is serious about yield suppression, the Federal Reserve must be involved," stated Ryan Swift, chief strategist at BCA, in a client note. "Unless the Federal Reserve deploys its balance sheet, any efforts by the U.S. government to suppress bond yields will fail. In fact, they could even be counterproductive if investors start to sniff out that the administration is getting desperate."

However, Swift anticipates that Fed Chairman Kevin Warsh will be hesitant to intervene, given his emphasis on allowing market price discovery during his tenure at the central bank.

"Market participants are learning to play the ball, not the referee — and market prices will continue to respond in the direction and magnitude they see fit," Warsh remarked after the July Fed meeting.

Similar to other analysts, Swift does not view the recent rise in yields as particularly alarming, suggesting that the 30-year bond is trading near its "fundamental fair value" based on the Fed's benchmark rate and projections for the central bank, inflation, unemployment, and market volatility.

The 30-year bond is currently trading slightly above its 50-year average of approximately 5.16%. As of Tuesday morning, the benchmark 10-year note was trading precisely in line with its historical average of 4.64% since the early 1960s.

"The bond market's message is straightforward: fiscal or monetary policy should be tighter," wrote Nohshad Shah, head of fixed income sales for Europe, the Middle East, and Africa at Citadel Securities. "Preventing Treasuries from clearing at lower prices does not eliminate that pressure … it merely shifts it elsewhere."

The Federal Reserve is expected to provide further insight at its upcoming meeting on September 15-16, with markets assigning approximately a 40% probability of a rate hike, according to CME Group calculations. Warsh is scheduled to speak at the Fed's Jackson Hole, Wyoming, symposium on Friday, where he may address the Treasury's actions.

Krishna Guha, head of economics and central bank policy at Evercore ISI, suggested that the Fed chairman might opt to avoid direct commentary.

"It will not be easy for Warsh to comment on yields in a way that is reassuring to markets while at the same time avoiding contradicting Bessent's unconventional actions, and Warsh might just decide to take a pass," Guha wrote.