Ex-chefe para Bessent: ‘Let the bond market speak’

Scott Bessent, who now serves as the Secretary of the U.S. Treasury, once worked with investment titan Stanley Druckenmiller. In a recent Wall Street Journal article, Druckenmiller, now managing his own capital, has advised Bessent as he navigates a credibility crisis while managing interest rates in the Treasury market. Druckenmiller argues that elevated interest rates signal "future problems," and artificially suppressing them only increases threats.

He believes there is no dysfunction in the market that would justify the long-duration security repurchase operations announced by Bessent. Druckenmiller notes that volatility has been contained, and transactions have proceeded orderly, highlighting the machine's proper functioning. According to Druckenmiller, U.S. debt has surpassed $40 trillion, and interest expenses are projected to exceed $1.1 trillion this fiscal year, surpassing the defense budget.

Despite this, long-term Treasury yields remain at or below the nominal growth rate of the economy. The manager asserts that the bond market has not been fulfilling its role as a "bond vigilante," instead acting like a compliant entity that finally seeks to voice dissatisfaction. Druckenmiller emphasizes that the 10-year Treasury yield is the most critical price in the world and the only remaining fiscal discipline tool for the U.S. He contends that neither party will campaign for social program reform, as they have been expanding benefits and ignoring arithmetic for the last decade.

Druckenmiller warns that democracies only act when mortgage rates strain budgets, bond auctions fail, and the political cost of high long-term interest rates outweighs the cost of inaction. He notes that while families and businesses have benefited from low rates, the borrower most in need has not taken advantage. With rising current expenses and elevated Treasury yields, interest expenses could reach 4.5% of GDP by 2033 and 144% of discretionary spending by 2043, according to Druckenmiller.

He warns that anyone claiming social benefits will not be cut is lying, either restructuring these commitments on their terms and protecting those who need them most, or the bond market will do it for them. Druckenmiller advises the Treasury to limit buybacks to liquidity operations when necessary. He concludes that if the 30-year bond must be traded at 5.5% to attract buyers, it's not a crisis but a cost to be paid.