Bessent credits Trump policies for bond market

Key insight: Bessent says Trump policies boost Treasury market, lower borrowing costs

Supporting data: Treasury returns are up 6% this year

Forward look: Treasury to keep auctions steady, avoid market shocks

Treasury Secretary Scott Bessent Wednesday said the administration's economic policies were addressing affordability for Americans.

Speaking Wednesday at the New York Fed's Treasury Market Conference months after Trump's "liberation day" trade policies sparked instability in the Treasury market, Bessent said the U.S. had the "best-performing developed bond market this year," and situating the department's work within President Trump's push to "Make America Affordable Again."

"Lower Treasury borrowing costs mean lower corporate borrowing costs, lower mortgage rates, and lower car payments," he said. "The Treasury market's total returns year to date are 6 percent—its best year since 2020…that all translates to greater affordability for all Americans."

Bessent outlined a host of technical and regulatory changes with the goal of improving market liquidity, including with a revamped Treasury buyback program, in which the department buys back older debt to support liquidity and reduce swings in the market. 

After market turmoil following the April 2 rollout of President Donald Trump's sweeping tariff program triggered a selloff, the market experienced the sharpest yield spike since 2001, agency officials have said they would evaluate "potential enhancements" in order to "better achieve its liquidity support and cash management goals."

Bessent also touted pending reforms to the enhanced supplementary leverage ratio, or eSLR, which he argued has "become a consistently binding constraint rather than a backstop." 

In June, bank regulators submitted a draft rule to the Office of Information and Regulatory Affairs — a branch of the Office of Management and Budget that now reviews regulations — that would modify rules for banks' supplementary leverage capital requirement.

The proposal would replace the current flat 2% enhanced supplementary leverage ratio applied to the largest banks with a variable buffer equal to half of each bank's Method 1 global systemically important bank surcharge, ultimately reducing banks' required Tier 1 capital and leverage-based total loss-absorbing capacity and long-term debt requirements.

Leverage ratios are designed to apply uniformly to all a firm's assets, regardless of each asset's perceived risk, which is why they are often smaller than risk-based capital standards and harder to manipulate, acting as a secondary safety net. During the COVID-19 pandemic the regulators briefly allowed banks to exclude Treasuries and allowed large banks to appear better capitalized than they would otherwise if their Treasury bond debt was factored in.

Trump appointees like Bessent have supported the move, but the idea has received mixed reviews from some observers in the past. Former Republican FDIC Chair Sheila Bair said in a 2020 op-ed that loosening the SLR would amount to backsliding on Dodd-Frank reforms that protected the market from moral hazard, encouraging banks to buy government debt and increasing systemic risks.

The current 2% rule discourages banks from engaging in "low-risk activities, such as Treasury intermediation," according to Bessent. 

The Secretary said these measures respond to systemic shifts in demand for government debt, particularly short-term bills from money market funds, which grew by over a trillion dollars this year, reaching $7.5 trillion, and from the stablecoin sector. The latter is estimated at $300 billion,  but Bessent says it could grow tenfold by 2030.

Regulation and compliance

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"The stablecoin market could grow tenfold by the end of the decade thanks to the innovation made possible by the GENIUS Act," Bessent said, referring to recent legislation enabling digital dollar instruments to back stablecoins with Treasury bills. Banks, too, are increasing their holdings according to the official, "as they shake off the excessive oversight that held them back."

Bessent framed these developments as part of Treasury's "regular and predictable" issuance philosophy of issuing all Treasury securities on a stable, predetermined schedule. This approach, he said "promotes transparency and investor confidence" and ensures gradual, data-based adjustments to the quantity and maturities of bonds offered. 

"We will remain analytical in our decision-making, adjusting issuance gradually to avoid market disruptions," Bessent said. "We will provide public forward guidance to the extent practicable. And we will regularly canvass the market for feedback on how our issuance decisions are being received."

Looking ahead, Bessent said Treasury does not expect to alter the amount of debt  for sale at its regular auctions "for at least the next several quarters," citing "existing financing capacity from current auction sizes and robust demand in the bill market."