Plus: Reaction to Kevin Warsh’s speech at Jackson Hole.
By David Enna, Tipswatch.com
A week ago, Treasury Secretary Scott Bessent announced plans to double the Treasury’s buy-back of long-term U.S. debt, up from $2 billion to $4 billion a week through the fall. And bigger buy-backs could be coming.
The announcement, coming one day before the Treasury’s auction of a reopened 30-year TIPS, managed to drop long-term yields by 9 or 10 basis points. The effect lasted a few hours. The market quickly noticed the “drop in the bucket” amount and moved yields higher.
Why would the Treasury do this? In my opinion, it was an attempt to shift borrowing costs from the long-term (5.18%) to short-term (3.80%) to help the U.S. finance a massive (and fast-growing) federal deficit. The fiscal 2025 federal deficit was $1.75 trillion and that will grow to about $1.9 trillion in fiscal 2026.
And, in theory, the buy-backs could nudge long-term yields a bit lower, a long-time goal of the Trump administration.
This led to a savage analysis from renowned investor Stanley Druckenmiller in a Wall Street Journal op-ed titled, “Let the Bond Market Speak.” (Gift link.) Druckenmiller, it should be noted, has been a mentor to both Bessent and Federal Reserve Chairman Kevin Warsh. I advise reading the entire op-ed, but here are some excerpts:
The market’s verdict was swift and correct: This wasn’t liquidity management, it was price management—and a mistake far larger than $4 billion suggests. …
Inflation is 3% to 4% and has been above the Fed’s target since 2021. Unemployment is 4.1%, full employment by any definition. The deficit is running near 6% of gross domestic product, a number America has never before produced in peacetime at full employment. The national debt crossed $40 trillion the same week Treasury intervened. Net interest will exceed $1.1 trillion this fiscal year, more than the defense budget. …
The long-term Treasury yield is the most important price in the world. It is also the only fiscal disciplinarian the U.S. has left. …
Governments defending prices against fundamentals always lose. The only variable is how much they spend before conceding. The U.S. shouldn’t put itself on the wrong side of that trade.
Please, no more manipulation
I started writing Tipswatch in March 2011, just before the Federal Reserve launched into a decade of on-and-off bond-buying known as quantitative easing. QE is outright bond-market manipulation. This is not a conspiracy theory; it is the admitted goal of QE — to force interest rates down (and spur the economy higher).
What was the effect of this QE? It pushed real yields deeply negative and nominal yields down to as low as 0.52% on the 10-year note in August 2020. This manipulation, combined with supply shortages, lavish government spending, and generous U.S. stimulus checks, sent U.S. inflation soaring to a 40-year high less than two years later.
Here is the trend in the 10-year nominal yield over the last 56 years.
Note that the current 10-year yield of around 4.7% is actually historically low, if you remove the decade of quantitative easing. To make this perfectly clear, I created these charts of 5-, 10-and 30-year nominal yields removing the decade-plus of QE manipulation:
These three charts demonstrate that the mid-2026 longer-term nominal yields are solidly in the “normal” range, especially at a time of eternally increasing federal deficits, along with a relatively solid U.S. economy and strong demand for corporate financing for the AI buildout.
This is not the time for the Treasury to interfere, unless the real motive is to lower U.S. borrowing costs to pay for even higher deficit spending.
As a side note, Bessent’s move struck at the world’s confidence in the U.S. dollar, with the dollar index losing about 0.5% of its value since Aug. 18. More significantly, the buy-back announcement caused a surge in alternative currencies like Bitcoin, up 24% since Aug. 18.
If anyone wants to offer a conspiracy theory on this, I am willing to listen.
Is inflation a factor?
Certainly. Those very high interest rates of the 1980s brought the pain needed to bring down exceptionally high inflation after the oil shock of 1973. Annual U.S. inflation rose to 13.5% in 1980. The high interest rates imposed by Fed Chairman Paul Volcker (he took that role in late 1979) broke the inflation trend, with the annual rate falling to 3.2% by 1983. Here is the trend in July-to-July annual inflation from 1971 to 2026:
The main point of this chart is to show that today’s annual inflation rate of 3.4% is certainly not “low” and the bond market reflects this in the cost of borrowing.
Chairman Warsh’s dilemma
At his last news conference on July 25, Fed Chairman Kevin Warsh said he wants to limit the Fed’s forward guidance and let the financial markets set the way. He said:
Monetary policy matters not just by what we say or even what we do; monetary policy matters by how it affects the real economy. And these prices that we see in financial markets is one of the many ways in which it affects the real economy. We’ll be continuing to watch that market information, see how it responds to incoming events, and that can help inform our decision-making when we meet in seven or eight weeks. …
I was comforted that markets in the inter-meeting period weren’t reacting to us. They weren’t reacting to dots or to speeches. They appeared more than ever to be reacting to real-time events.
Warsh also wants to reduce the Fed’s balance sheet built through years of aggressive QE, and that means the Treasury buy-backs are working in the opposite direction from his goal.
The problem for Warsh is that Bessent’s initiative came without any actual “market” justification, except to benefit the Treasury by moving borrowing costs to lower-yielding T-bills, where the Federal Reserve has control over rates.
And there is the problem. Is Warsh now facing pressure to hold short-term rates stable, or even to lower them, to accommodate the Treasury’s gambit? From a Reuters report today:
Many investors say Bessent is fighting the wrong fight. They say strong growth, sticky inflation, likely Fed hikes and heavy bond supply, including from AI-driven corporate borrowing, are what’s pushing yields up, along with a widening fiscal premium tied to the deficit — not market dysfunction. …
Warsh has long criticized the Fed’s large-scale asset purchases, arguing such interventions should be reserved for genuine market dysfunction, with rate policy driving the employment and inflation mandates.
Update: Warsh at Jackson Hole
I just finished watching Kevin Warsh speaking at the Jackson Hole Economic Policy Symposium. My immediate reaction was that this was a good speech: somewhat specific, somewhat hawkish, and a strong statement that fighting inflation is the priority. Read the full text here.
For example, Warsh was very specific about the Fed’s favored measure of inflation (as opposed to his past attractions to alternative measures):
The Fed’s price-stability objective of 2 percent, as measured by the personal consumption expenditures (PCE) price index, is a firm, fixed target.” …
And he added this:
“The Fed’s preferred measure of inflation, the 12-month change in the PCE price index, stands at 3.7 percent, while the six-month change is 4.1 percent. … And while this summer’s PCE and CPI readings were better than expected, they do not tell me that underlying trends have meaningfully improved.”
And that the economy can handle higher interest rates:
Credit and loan markets are showing few signs of policy restraint. Certain sectors—like housing and agriculture—are showing strains. But, on balance, I would be hard pressed to describe broad financial conditions as restrictive.
Maybe I am reading too much into this, but did he give Bessent a soft slap in the face with this?
“Short-term interest rates are the predominant tool to achieve the dual mandate. Unconventional policies to spur economic activity may suit genuine crises but should otherwise be used sparingly, if at all.”
And concluded with this:
There is one signal nobody can miss: The responsibility for 65 months of sustained, elevated inflation sits squarely with the central bank. And that is where it belongs.
Here is my standard: We must be confident that underlying inflation is moving to our objective, clearly and at sufficient speed. Otherwise, we have work to do. That’s our job . . . our mandate . . . and our charge to keep.
If the stock and bond markets were looking for “future guidance,” they didn’t get it. But they did get the specific and strongly-stated goal of hitting the Fed’s inflation goal.
Conclusion
Even though longer-term Treasury yields are reaching 15- to 20-year highs, those yields can be considered “normal” if you remove 10-plus years of bond market manipulation by the Federal Reserve.
What Bessent is planning is not quantitative easing; it is shifting U.S. debt from long-term to short-term, and an attempt to nudge long-term yields down.
This is not the time for a new course of manipulation by the Treasury. It is the time for Congress and the president to get serious about reducing the upward trend in the federal deficit, whether by spending cuts, tax increases, or more probably … both.
And that won’t happen in 2026.
Also read: Federal Reserve is losing credibility, at the worst possible time
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Treasury Inflation-Protected Securities 
I still think Hassett wins the prize.