Vigilance against the vigilantes
U.S. Treasury Secretary Scott Bessent seems to be stepping up the fight against the "bond vigilantes". CNBC reported on Monday that part of his arsenal could be cash at the Treasury General Account to fund the purchase of longer-dated bonds instead of issuing short-term bills. Markets seemed to give the idea the thumbs up, with the 30-year yield falling 5 basis points and the curve flattening.
But is the TGA really a longer-term source of funding for what Bessent last week called a "Treasury Twist"? Apart from emergencies, Treasury wants a chunky TGA balance. Bill issuance is rising, and so too is Treasury's reliance on bills for funding. This increases rollover risk, which necessitates a larger TGA buffer. Leaning more heavily on short-term bill issuance and simultaneously reducing cash on hand to mitigate rollover risk would seem to be a counter-intuitive and dicey proposition.
Tariff tremors
Talking of firepower, U.S. President Donald Trump has loaded up the tariff guns again, and is turning them on ally, neighbor, and key trading partner Canada. Trump is threatening to impose 50% levies on certain Canadian goods, including all cars, trucks and auto parts. These duties will kick in on January 1 next year if no agreement is reached by then.
Canada is not flinching. Not yet, anyway. Prime Minister Mark Carney has retaliated with "dollar for dollar" tariffs on imports of U.S. steel, electronics and other products, to take effect on September 8. Trump's approval ratings are at an all-time low, and with the mid-terms looming, perhaps he feels the need to flex some muscle on the international stage. For his part, perhaps Carney senses Trump's domestic vulnerability so is taking up the fight. Either way, relations between the two countries are deteriorating.
Ace in the Jackson Hole
Fed Chair Kevin Warsh will deliver the keynote address at the Kansas City Fed's annual Jackson Hole symposium on Friday. The eyes of the financial world are on him. Warsh wants to improve the Fed communications strategy, but only three months into his tenure, his communications have raised more questions than answers. How does he plan to get inflation back to target? How committed is he to the 2% inflation goal? Will he resist President Trump's demand for lower interest rates.
His task has arguably been complicated by Treasury Secretary Scott Bessent, who last week said Treasury will temporarily expand buybacks of long-dated bonds. Essentially, Treasury wants to get yields down, juice GDP, and grow the economy out of the debt hole it's in. But this is inflationary, and inflation has already been above target for more than five years. Warsh has said bond yields are a useful signal, Bessent wants to actively massage them lower. Contradictions that require clearer communication.
