Wall Street on Alert for Bessent to Act on Bond Yields Again

(Bloomberg) -- Wall Street traders wrong-footed by Treasury Secretary Scott Bessent's surprise August decision to upsize purchases of older securities are game-planning for more activism, with key clues potentially surfacing Friday as the department prepares to update its debt management plans in November.

Bessent's "Treasury twist" came in response to surging US yields, a sore spot for a Trump administration that had promised to deliver lower borrowing costs — and it initially did have an effect. But by intervening as he did, Bessent also effectively tore up the Treasury's decades-long playbook of being "regular and predictable" with its actions to achieve the lowest debt costs over time.

From a high-level perspective, the move sparked debate over whether such tinkering, by injecting uncertainty, might end up making the market more volatile. On a more practical note, though, it put Wall Street on watch for the possibility of further activism at the Treasury's next quarterly debt-refunding announcement in November, just one day after midterm elections.

On Friday, the biggest bond dealers will receive a list of survey questions by the Treasury ahead of the refunding. Market watchers say the nature of the queries may serve as a Rorschach test of Bessent's leanings.

"You've announced to the market that these yield levels are problematic," said Vishal Khanduja, head of broad markets fixed income at Morgan Stanley Investment Management. "That's why we believe that the next two refundings, with November right after the midterms, are going be pivotal."

There are several ways the Treasury could go, said Martin Tobias, a strategist on the banking side at Morgan Stanley. The most conventional option would be a continuation of the status quo: maintaining current auction sizes at least for the next several quarters with no changes to forward guidance, as it did in August. Another alternative would be to revise forward guidance on issuance to exclude increases to the longer-dated securities, while focusing on increases in two- to seven-year maturities.

Yet another option — and least conventional — would be to explicitly state how large the Treasury's share of bills can be. Officials have never articulated how large a slice they're willing to tolerate, even as the share of bill issuance has grown.