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Bessent’s brag

Scott Bessent, the US Treasury Secretary, tweeted this on Friday: 

This has precipitated a lot of debate, or whatever passes for debate, on that social media platform. Most of it has been silly, but I think the tweet raises a question which is worth discussing seriously, or at least somewhat seriously. How much of the behaviour of the benchmark 10-year Treasury is down to the stewardship of the Treasury secretary and the president? And is that behaviour something they should be bragging about? 

First, though, a dose of general scepticism: politicians’ responsibility for economies’ short-term performance is usually overstated. Economic activity and market behaviour are hard to control (except by wrecking them outright). Most political interventions take so long to play out that the leaders responsible for them are out of office by the time they succeed or fail. The default position on these matters, in the absence of powerful evidence, should be “wait and see.”

With that joyless and pedantic point made, let’s zoom in on the numerical bit of Bessent’s tweet:   

One obvious point is that the chart strongly implies that Treasuries’ performance back in 2020 was due to Trump’s policies. This is just dumb. Treasuries did well that year because of pandemic flight to safety. But we can set this aside. This year’s Treasury performance — total returns of nearly 10 per cent — is clearly Bessent’s focus.

A more to-the-point objection is that Bessent (a former fund manager, after all) is taking advantage of a calendar coincidence. Have a look at a the 10-year Treasury yield, which rises as the price falls and vice versa, since last summer:

Starting the clock at the start of the new year has Franklin the Turtle buying when yields were near a recent high, and picking inauguration day would have done the same. Returns would be meaningfully lower, though, had the clock started running on inauguration day, or the days Trump’s signature policies (the “liberation day” tariffs and the One Big Beautiful Bill law) were put in place. 

Again, we can treat this as a minor quibble. Bessent’s brag is that, with Trump as president, yields have fallen a bit and been broadly stable, which is a good thing for the country. Should we credit the administration for this outcome? 

The short argument for “no” is that the reason yields were high at the start of the year — setting little Franklin up for a nice return — is that the bond market was nervous about Trump’s fiscal policies and his attitude towards the Fed; and the reason yields have fallen is because Trump hasn’t been as incompetent as feared. This is a somewhat odd thing to take credit for (“We weren’t as crazy as we said we’d be!”) but it is also precisely Bessent’s point (“We proved the doubters wrong!”).

A better argument, for or against, would focus on why bond prices and yields moved. Trump haters will point out that one reason prices rise and yields fall is because growth expectations worsen. Mike Bird of The Economist makes this point neatly:

Have growth expectations fallen under Trump, though? It’s hard to say. If one uses inflation indexed 10-year Treasury yields — real yields — as a straight proxy for the growth outlook, as some people do, then little Franklin should indeed be sad. Real yields have fallen from 2.2 to 1.8 per cent this yield. I don’t think that real yields are a great growth proxy, though — they also encode inflation volatility expectations and idiosyncratic demand dynamics in the bond market.  

So it is best to consider broad measures of the economy at the same time. It does look as though in the fourth quarter we are experiencing an economic slowdown, and consumer and business sentiment is pretty bad. But GDP estimates for real GDP growth for next year have been around 2 per cent, which is OK relative to recent years and to estimates of potential growth. My guess is that falling long-term growth expectations have not moved yields down much this year.

Which leaves us with expectations for inflation and the volatility of inflation. And here, the case for the Trump administration is stronger. Yes, inflation is still above target, and part of that is probably due to Trump’s tariffs. But longer-term inflation expectations, which are more important to the 10-year Treasury than actual inflation, are anchored. Here, for example, is 5-year, 5-year forward break-even inflation, which is derived from the differences from different tenors of nominal and inflation adjusted Treasuries: 

Along the same lines, the term premium (to the degree we can measure it) doesn’t seem to have risen much this year, indicating that expectations for inflation volatility haven’t moved up much. 

Of course, this is all preliminary to a more substantive question: what did the Trump administration do to keep inflation expectations anchored or more broadly get yields to come down some? You might argue that Bessent has relied on trickery by issuing most new federal debt in the form of short term bills, keeping price pressure off of the 10-year yield. Or you might argue that Trump’s jawboning of companies about price increases, sweet talking of Saudi Arabia and other oil producers, and selective chickening out on tariffs has helped keep inflation expectations low. Or you might argue that the administration has not done anything impactful at all. 

The right answer, unfortunately is: wait and see. Bessent has bragged that the administration has the Treasury market in the palm of its hand. That amounts to a bet that the market will behave itself for another three years. We wish him luck. 

One good read

AI and bond yields.

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