Why Bessent Blinked | Luke Gromen on Doubling of Treasury Buyback Plan to Tame Long-End Yields
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Today's episode is brought to you by the Tucrium Corn Fund, ticker c o r n. Let's get into it. Got a very important conversation today. I'm joined once again by Luke Gromen of Forest for the Trees Research. Luke, welcome back to Monetary Matters.
Thanks for having me back on, Jack. It's great to be here.
Luke, last time we spoke in December, you had a thesis that AI and the AI CapEx build out would cause borrowing costs on the long end to rise. That was a pretty contrarian theory, but here we stand right now, and the hyperscaler issuance for this year is probably gonna be about 500,000,000,000, and the long end yields have risen a lot, about 50 basis points since we last spoke. So the thirty year yield, well over 5%, and this this rise in yields has caused market angst and so much so that we actually had a news item from the treasury secretary today. So I sort of set the stage for you today. S
Yeah. A lot of demand for capital has been driving it. Right? You've got essentially AI bidding for capital, secretary B. Bessant bidding for capital. The two of them are competing with each other. We're getting to the point, I don't think we're fully there yet, where it's a bit of a paradox because AI is bidding for capital and bidding up the cost of capital against a government who is dependent on receipts, half of the receipts from employment and AI in the short run, I think is going to hurt employment receipts. It has to for the AI case to make sense because that's what productivity is in
Treasury secretary Bessen just did literally today, August 19, raise the buyback level. So it's increasing by at least double the size of liquidity support of buyback operations for treasury securities, government bonds from the ten year to the thirty year sector, so the long end support. So what what is this program and how do you think it is going to work or not work?
It's essentially a version of depending on how you want to spin it, Operation Twist. It's a soft another soft form of yield curve control. And, you know, we were the report we wrote for clients last the full report wrote for clients last week on August 11, we highlighted that that Bessen's Yen interventions were a soft form of yield curve control and his admonishment to upsize the FEMA swap lines so that Japan could use them were a form of soft form yield curve control. And we'd highlighted that for eight his eighteen month tenure, that's all he's done is move down the path towards yield curve
I think part of the reason yields have risen so much is Kevin Worsch has came in. And and when Kevin Worsch took over the Federal Reserve, there was a time where people thought he's so strong. He's so hawkish. So we've gotta buy long dated yields because he's gonna have inflation under control. What did you make of that then, and what do you make of that now?
I thought it was bullshit then, and I think it's bullshit now. And I wrote as much to clients. Kevin Warsh, people said Kevin Warsh is a hawk. Go read his December 2018 op ed that he co authored with Druckenmiller. They were begging, begging for the Fed to cut rates because bank stocks were down 15% off the highs. He's no hawk. And that's what we said at the time. Everyone wanted to believe, and this is the tricky part of markets. Right? The math was crystal, a, his own record. He wasn't a hawk. B, the math in the same way that the math suggested that there was no way that Elon could doge 200
And so here we are. What is the math?
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