The Treasury secretary cannot buy his way out of an arithmetic problem

THE TREASURY secretary cannot buy his way out of an arithmetic problem.

In mid-August, yields on 30-year US government bonds touched their highest level since 2007, while the 10-year note hovered around 4.74%, well above the Congressional Budget Office's own projection. The market had been selling bonds for nearly two months. So Scott Bessent, Mr Trump's Treasury secretary, doubled the Treasury's programme for buying back older long-dated debt, raising the weekly limit to at least $4bn per maturity, then hinted he might go further. The yields dipped for a day or two. Then they resumed climbing.

That brief rally told the market everything it needed to know about the scale of the problem. A programme whose maximum size is a few billion dollars per quarter is a rounding error against $32trn of outstanding public debt. Mr Bessent is using a teaspoon to bail out a sinking ship.

The buybacks are not even structurally coherent. The Treasury funds its purchases of long-dated bonds by issuing more short-term Treasury bills, which already comprise 22.2% of outstanding debt, above the recommended ceiling of around 20%. That shifts the government's borrowing costs closer to the Fed's policy rate. If inflation proves stickier than expected and the central bank raises rates, the Treasury's interest bill accelerates. In the first 10 months of fiscal 2026, net interest costs reached $963bn, accounting for roughly 15% of all federal spending. The government now pays $3bn a day to service its debt, trailing only Social Security in total outlays. Every day the Treasury pushes the maturity profile shorter, it increases the sensitivity of that bill to a future rate rise.

The question is not whether Mr Bessent can manipulate yields for a session. It is what is driving them up in the first place, and whether the political incentives of the current administration allow the underlying causes to be addressed.

Three forces are at work. The first is fiscal: the deficit is projected at nearly $2trn this year, or about 6% of GDP, and is on track to grow to $3.1trn by 2036. Even the primary deficit, which excludes interest, runs at 2.6% of GDP. The 2025 reconciliation act, which extended tax cuts and increased spending on border security and immigration enforcement, added $4.7trn to projected deficits over the coming decade, partially offset by tariff revenue. In the first nine months of fiscal 2026 alone, the government borrowed $1.4trn, already ahead of the same period a year earlier. The market is pricing in the arithmetic of a government that spends far more than it collects.

The second force is supply-side, in the technical sense. Debt held by the public is approaching 100% of GDP, up from a half-century ago when it barely cleared 30%. Foreign holders — Japan, China and the UK — are running down their positions. Partly this is a sign of waning confidence in the US fiscal trajectory. Partly it is simple substitution: Japanese government-bond yields have climbed above 2%, making domestic debt more attractive as the Bank of Japan normalises policy. Washington can no longer count on the old habit of foreign savings recycling into American Treasuries at whatever yield the Treasury chooses. At the same time, American companies have issued nearly $1.7trn in corporate bonds this year, a 27% increase from the prior year, as artificial-intelligence hyperscalers raise capital for data-centre construction. That flood of private issuance competes directly with government debt for a finite pool of patient capital.

The third force is the Federal Reserve. Kevin Warsh, who succeeded Jerome Powell as chairman in May, has dismantled the Fed's system of forward guidance. He refuses to say what economic conditions would trigger a rate hike, has shortened policy statements, and has floated reducing the number of regularly scheduled meetings. Mr Warsh argues that markets should read the data rather than chase the Fed's hints. There is something to this. Over-reliance on central-bank signalling did contribute to the complacency that enabled the spending binge of the past decade.

Yet the consequence of a "quieter Fed" is a higher term premium — the extra yield investors demand for bearing the risk of holding long-dated debt when they cannot anticipate where policy is headed. Stephen Stanley of Santander compares Mr Warsh's approach to Paul Volcker's, which let markets set long rates. The result was higher long rates, not lower ones. Markets are demanding compensation for policy uncertainty. That is rational pricing, not market dysfunction.

Taken together, these three forces explain why the Treasury's theatrical intervention has proved fleeting. The deficit will not shrink unless the primary deficit is addressed. Corporate issuance will not pause while the AI investment cycle is in full swing. And Mr Warsh's communication revolution, however principled, will not lower the term premium.

To be sure, Mr Bessent has pointed to a future plan to bring the deficit below 4% of GDP by the end of Mr Trump's term. He has argued that the deficit has "likely peaked". The market has yet to be convinced, and not without reason. The current administration extended tax cuts worth hundreds of billions of dollars. It increased spending on border enforcement and immigration. It has shown no appetite for touching entitlement programmes, even as the CRFB warns that Social Security and Medicare trust funds face exhaustion within seven years. The gap between Mr Bessent's rhetoric and the administration's legislative record is the gap between aspiration and arithmetic.

The deeper problem is institutional. Mr Trump has repeatedly called for the Fed to cut rates to lower financing costs, even as debt mounts. That pressure on central-bank independence is the sort of political cross-current that makes investors nervous. Mr Warsh's refusal to give guidance may be partly defensible economics. It may also be a way to insulate the Fed from a president who treats interest rates as a policy lever rather than a market outcome. The resulting ambiguity, however, leaves bond markets to set the price of fiscal risk themselves. They are pricing it high.

So what is the alternative to buybacks? The honest answer is that Mr Bessent has none that the current political coalition will accept. Deficit reduction requires raising revenues, cutting spending, or both. The administration has pursued neither in any meaningful scale. The tax cuts of the 2025 reconciliation act are the opposite of revenue enhancement. Entitlement reform is a political third rail that no president, Republican or Democrat, has been able to cross. Tariffs, the administration's preferred revenue-raising tool, are inflationary in their own right and provoke retaliation that shrinks the tax base. Mr Bessent's structural toolbox is empty because the politics he serves have consumed the tools he would need.

The buyback programme may make sense as a signalling device. It tells traders that the Treasury is watching and will intervene if liquidity dries up entirely. It also tells them that the Treasury recognises its own constraint. The danger comes if the programme is expanded beyond its modest size. Evercore ISI's Krishna Guha described it as a "weak form Operation Twist" (the Fed's 1960s experiment in buying long bonds and selling short ones). Bigger buybacks would only amplify the maturity-risk shift, making the government more exposed to rate shocks while creating the impression that the Treasury cannot fund long-term debt at prevailing prices. That last signal would be a self-fulfilling one.

There is an institutional lesson here for investors. Bond yields are not a mechanical function of Treasury policy. They are the market's assessment of fiscal sustainability, monetary credibility and the availability of safe assets in a world where governments are spending recklessly and central banks are withdrawing guidance. Mr Bessent's buyback programme does not change any of those fundamentals. It is a cosmetic gesture against a structural shift.

The broader lesson is less flattering for the Treasury. America's bond market is still the deepest, most liquid market in the world. But it is not immune to the laws of supply and demand. When a government borrows $2trn a year, tells foreign holders that better returns exist at home, watches corporations crowd into the same asset class, and lets its central bank withdraw its forward promises, it should not be surprised when yields rise.

Better fiscal arithmetic would bring them down. That is not an argument for austerity. It is an argument for the elementary truth that you cannot subsidise tax cuts with deficit spending and then complain when the bond market charges you the going rate. Mr Bessent knows this. He just cannot do anything about it.