Wow

‘Wow’ was my reaction to reading Stan Druckenmiller’s opinion piece in the WSJ titled “Let the Bond Market Speak”, not in terms of the content as I agreed with everything he said but in the high profile, critical way he presented it. After all, he and Scott Bessent worked together for years. The piece also tells me again that Kevin Warsh is not on board either with the Treasury attempt to manipulate the long end of the yield curve. I say ‘again’ because Warsh himself has basically told us that he both wants the market to have more of a say in setting the cost of capital and he because we know he wants to shrink the size of the balance sheet and the Fed’s footprint in the market. And we know Warsh sat by the side of Druckenmiller for years prior to the new Fed Chair seat came available.

Here were some of the notable quotes from it in case you didn’t read it yet:

To the market’s immediate reaction with yields initially down and then right back up, “The market’s verdict was swift and correct: This wasn’t liquidity management, it was price management - and a mistake far larger than $4 billion suggests.”

“Treasury’s announcement gave the game away. It justified the larger operations as liquidity support in sectors with ‘consistent strong sponsorship from market participants,’ but strong sponsorship is the definition of a healthy, working market. There were no failed auctions, no dealer balance-sheet seizure, no forced unwinds, nothing resembling Treasurys in March 2020 or U.K. gilts in September 2022, the sort of genuine dysfunctional episodes that justify official action. Volatility was contained, and trading was orderly—not a malfunction but the machine doing its job.”

Believing that the long end wasn’t even fully pricing in where it should have been anyway, and that yields were actually “accommodative, not restrictive, of financial conditions” he said “The bond market wasn’t being a vigilante, as some would argue. It was being a pushover that had finally begun to clear its throat, and Treasury moved to quiet even that.”

Also this, “I have spent five decades trading on a simple premise: Markets aggregate information no committee possesses, and prices are how that information reaches decision makers. The long-term Treasury yield is the most important price in the world. It is also the only fiscal disciplinarian the U.S. has left.”

And the disease that is at the core of the problem, “Neither party will run on entitlement reform. Both have spent the past decade expanding commitments while ignoring arithmetic. Democracies don’t repair their finances because a budget office publishes a table. They repair them only when the cost of inaction becomes visible and immediate, when mortgage rates bite, when auctions tail, when the political price of a rising long bond finally exceeds the political price of touching spending.”

And to the real pushback against what Bessent did, “Every basis point of artificial yield suppression is a subsidy to procrastination. Suppressed long rates sugarcoat the interest-cost projections, shrink the apparent urgency, and let incumbents assure voters the debt is someone else’s problem. If Congress and the administration are unlikely to touch entitlements even with the market’s signal, they are certain not to touch them without one. Whatever this operation saves in basis points, it will cost multiples in delay.”

And to the timing of the operation, “Debt management that even appears to follow the political calendar spends the one asset that took two centuries to accumulate: the credibility of the Treasury market. That asset doesn’t regain its value so easily...Routine operations aren’t announced off-cycle, at double size, on the heels of the long bond’s hitting a two-decade high, with a signal that they can grow without limit. Judge an intervention by what it responds to. This one responded to a price, not to plumbing, which is exactly how the market read it, and why the effect evaporated within a day. You can’t buy your way out of a solvency conversation with liquidity tools. You can only postpone the conversation and raise the eventual price.”

Stan Druckenmiller’s bottom line, “Governments defending prices against fundamentals always lose. The only variable is how much they spend before conceding. The U.S. shouldn’t put itself on the wrong side of that trade, not with the most important price in the world, and not when that price is trying to say the one thing Washington most needs to hear: Let the bond market speak.”

https://www.wsj.com/opinion/let-the-bond-market-speak-81529d74

As I said, I agree with everything said here by Druckenmiller. I also argued last week that even if Bessent wanted to continue on this path, he picked a fight with a market that is much bigger than him and I’ll add that he’s not just pushing back against the US Treasury market but the JGB market too because we’ve seen over the past few years that what happens in the JGB market doesn’t stay in the JGB market.