I. I was at the beach this weekend, and I ran into Treasury Secretary Scott Bessent.
It was very odd because he was carrying a large bucket of seawater up the beach.
So, I said, “Scott, what are you doing?” And he said, “I heard the oceans were rising, so I am trying to fight it off by emptying it with this bucket.”
I then tried to explain that emptying 5 gallons from a 174 quintillion-gallon ocean would have no lasting impact. But – he wouldn’t listen.
II. But – it gets stranger.
He also put on a Lucy Van Pelt (from the Peanuts comic strip) costume, grabbed a football, and tried to get bond traders to kick it.
Sure enough, he found several willing to try – but he pulled away the football every time. And – I thought, “Why do those dumb bond traders fall for that over and over?”
Sidebar: Interest-Only Loans Got Better! (Again). Borrowers are desperate for payment relief in this high-rate environment – and Interest-Only Loans are turning into the go-to option, as more investors (that buy our loans) continue to step into the arena. As a result, interest-only rates keep falling, allowing borrowers to save $500 or more on their payments.
III. In the famous short movie “Bambi Vs. Godzilla” (about which I have blogged several times), Bambi did not do well…
In fact, the battle only lasted 3 seconds until Godzilla stepped on Bambi and squished him flat as a pancake. (Frankly, Bambi was a bit overconfident and got what he deserved in my opinion.)
IV. Rates fell today because Bessent announced he could use his massive $1 trillion Treasury General Account (Treasury’s check account) to buy Treasuries – to artificially increase demand and reduce interest rates.
This is on top of the program he announced last week, which involved borrowing via short-term T-bills to buy long-term Treasuries.
And just like the bond traders falling for Lucy’s football, they fell for Bessent’s comments again – believing he could bring down rates over a long period – and rates fell today.
But, renowned economist Lacy Hunt threw water all over Mr. Bessent’s comments on this recent Thoughtful Money podcast.
Hunt pointed out that we simply have way too much bond supply in what is now a $140 TRILLION bond market – and that trying to buy up supply is akin to using a squirt gun to put out a forest fire (a meme that was circulating on Twitter).
But this is what was really alarming: Hunt used to be Mr. Deflation/lower rates for a variety of reasons – and he is now on team inflation and higher rates for longer.
- There is simply not enough capital to meet the massive borrowing and investment needs across the world – so yields will have to climb.
- Labor shortages (from less immigration and slow population growth) and deglobalization (broken supply chains, more costly local production, etc.) will continue to make everything more expensive.
- The money supply is increasing too quickly.
It is these very valid inflation concerns that are driving the $140 trillion bond market, and there is likely little Mr. Bessent can do about it over the long run.
Mr. Bessent is a mere Bambi compared to the Godzilla bond market – that will remain focused on inflation no matter what Mr. Bessent does.
So – enjoy today’s lower rates while they last.
