Bessent Abandons Trend Reversal Amid Deficit Reduction Challenges, Delays for Political Leverage in Midterm Elections

On August 25, Fox Business reporter Charlie Gasparino reported that informed Wall Street executives revealed that Bessent's real goal is to "instill fear in bond shorts" by artificially inflating bond prices through Treasury buybacks, adjusting the debt issuance structure, and even canceling ultra-long-term products like the 20-year bond. This aims to trigger massive passive buybacks from CTA trend-following funds, pushing the 10-year yield down to around 4.3% before the midterm elections.

Recent data shows that global bond market short positions held by CTAs and trend-following strategy funds are nearing historical extremes, measured at approximately $155 million DV01. If prices rise by 2 standard deviations within a month, the total scale of buybacks and reinvestments could reach $150 million DV01, setting a new historical record. Bessent, who comes from a trading background, is not focused on reversing the yield trend under the bleak reality of deficit reduction; instead, the core of his strategy is to buy time, hoping to apply precise pressure on the market's technical weaknesses and create a narrative of declining interest rates in the pre-election window.

However, Bessent's interventions have had limited effectiveness so far, with U.S. Treasury yields continuing to rise. It wasn't until the Treasury revealed it would use up to $954 billion from the TGA as support that yields slightly retreated, but the effect was still short-lived. Critics point out that the buyback scale is merely a drop in the bucket compared to the massive deficit, total debt, and high inflation.

Deeper friction has arisen between the Treasury and the Federal Reserve. Bessent's interventions have left Fed Chair Waller deeply dissatisfied, significantly cooling his willingness to reduce the Fed's balance sheet. Market observers believe this has effectively created a sort of entanglement between the Treasury and the Fed's balance sheets. Analysts suggest that Bessent's actions before the elections could indeed trigger a self-reinforcing feedback loop of short covering, pushing the 10-year yield towards 4.3%. However, after the midterm elections, structural upward pressure on yields and gravitational forces on stock valuations may return in a more intense manner.