On September 1, we warned you that September is back. We wrote, "Everyone in the stock market knows that September is the cruelest month for stocks. But when it is a bad month, it tends to create buying opportunities for a year-end rally that often starts in October." So far, the month has been crueler to bond investors than to stock investors. The 10-year US Treasury yield rose to 4.96% today from 4.76% at the end of August (chart). We think this will turn out to be a buying opportunity if US Treasury Secretary Scott Bessent fires his bazooka to avert a spike above 5.00%.
Over the past few weeks, Bessent has displayed several tools to push back against rising Treasury yields, including supporting the yen alongside Japan, expanding long-bond buybacks, and potentially drawing down the Treasury General Account to finance additional bond purchases. Yesterday, the Treasury unveiled a $6 billion buyback operation in the 10- to 20-year sector. However, $6 billion amounts to little more than a rounding error in a $31.8 trillion Treasury market, including $5.5 trillion of long bonds (chart).
The Bond Vigilantes are daring Bessent to use the bazooka in his tool kit. That would mean much larger bond buybacks, financed by issuing more Treasury bills. Such an operation has been described as the "Bessent Twist."
Meanwhile, traders continue to price in more aggressive Fed tightening, with the 2-year Treasury yield rising to 4.59% today, 100bps above the current effective federal funds rate (chart). That is the largest spread between the two since 2022, during the Fed's post-pandemic rate-hiking cycle.
