Scott Bessent is facing a strong warning from his former mentor over the US bond market. Billionaire investor Stanley Druckenmiller says the US Treasury secretary may struggle if he tries to hold down long term bond yields.
Druckenmiller worked with Bessent at George Soros’s fund in the 1990s. He now says Washington should allow the bond market to show the true cost of US borrowing.
In a recent opinion piece, Druckenmiller said governments often lose when they try to defend asset prices against market forces. He said the key issue is not bond buying. It is the large US budget deficit.
The warning comes as the US faces a growing debt burden. The national debt recently reached $40tn and continues to rise. The annual budget deficit is also expected to reach about $2tn this year.
Druckenmiller said higher long term Treasury yields should act as a warning to US leaders. He argued that the government should use the rise in borrowing costs as a reason to reduce the deficit.
US Treasury bond yields are closely watched by investors around the world. They affect borrowing costs for the government, businesses and households. When bond prices rise, yields fall. When bond prices fall, yields rise.
Bessent has taken steps to support the Treasury market. The Treasury recently increased the maximum size of its bond buyback operations from $2bn to $4bn.
The move helped push long term bond yields lower for a short time. However, the fall did not last. Yields soon moved higher again.
Druckenmiller said the market had quickly rejected the move. He argued that the buyback looked more like an effort to influence prices than a simple step to improve market liquidity.
The debate could grow if the Treasury uses more government funds to support the bond market. Reports have suggested that Bessent may use money in the Treasury General Account for further bond purchases.
The Treasury General Account is the main cash account used by the US government at the Federal Reserve. It held close to $1tn, according to reports cited in the article.
Druckenmiller believes such moves will not solve the main problem. He said a credible plan to reduce the US budget deficit would have a much stronger and lasting effect on long term yields.
The issue also has a link to Bessent’s past. He worked with Soros and Druckenmiller during the 1990s. Their team played a key role in the events that led to the pound leaving the European exchange rate system in 1992.
That event became known as Black Wednesday. It showed the limits of government efforts to defend a currency when financial markets move against it.
Bessent has also been involved in efforts to support the Japanese yen. Earlier this month, the US and Japan worked together to support the yen. The move appeared linked to concerns about Japan selling US Treasury bonds to help fund yen purchases.
Some market experts have questioned whether government action can produce lasting results when investors have strong concerns about debt and economic policy.
Adam Posen, president of the Peterson Institute for International Economics, also pointed to the lessons of the 1992 currency crisis. He said government efforts to defend a currency can be difficult to maintain when market forces are strong.
Other factors are adding pressure to US bond markets. Geopolitical tensions have pushed oil prices higher. The failure of US and Iran peace talks has raised concerns about inflation.
Higher oil prices can increase costs across the economy. That can make investors less willing to hold long term bonds at low yields.
US trade tensions are also creating uncertainty. The collapse of recent US Canada trade talks has raised fresh concerns about growth and trade policy.
A weaker North American trade outlook could hurt US economic growth. It could also add more pressure to government finances.
For Bessent, the challenge is now clear. The Treasury wants to manage borrowing costs while investors are watching US debt and spending closely. Druckenmiller argues that the bond market should be allowed to send its message.
The coming months may show whether Treasury market action can bring lasting relief or whether the US must take stronger steps to reduce its deficit.
