Scott Bessent and the bond market: a pointless intervention

Key Points:

• Historical attempts at market interventions like Operation Twist have largely failed due to misalignment with monetary policy and market forces, as evidenced by past experiences in the U.S. and Japan.
• Operation Twist involves buying long-term debt and selling short-term debt to flatten the yield curve, but its success depends on concurrent monetary policy adjustments and credible fiscal management.
• The 1961-65 U.S. attempt failed due to excessive money growth causing inflation, while the 2011 U.S. attempt succeeded as part of broader quantitative easing that increased money supply and supported economic recovery.
• Japan’s yield curve control under QQE failed because the Bank of Japan’s purchases did not increase broad money growth, resulting in ineffective economic stimulus despite large bond holdings.
• Current efforts by Scott Bessent will likely fail unless accompanied by tighter monetary policy to slow money supply growth, as broad money growth remains high and undermines attempts to lower long-term rates.