The Bond Market Just Sent Trump a Terrifying Warning

Something happened last week that should concern anyone paying attention to the American economy and almost nobody noticed. It didn't come from a politician. It didn't come from a cable news panel. It came from a man who barely ever speaks in public, who has never sent a single tweet and who spent five decades making money by reading markets better than almost anyone else. Stanley Druckenmiller published an opinion piece in the Wall Street Journal and in it he did something you almost never see at this level of finance. He publicly took apart the actions of the sitting Treasury Secretary of the United States. And here's the part that stings. Scott Besant used to work for him. So did Federal Reserve Chair Kevin Walsh. This is not an outsider throwing rocks. Before I explain what set him off, take a look at this breakdown. You might not know Stan, so let me just be patient with me. Treasury Secretary Scott Besant worked under Druckenmiller at George Soros' firm for years. Most recently, Fed Chair Kevin Walsh worked alongside Stan for the last few years. Stan Druckenmiller, you can like Wall Street, hate Wall Street. He is one of the greatest living investors. This man is not a big attention speaker. He does very little media and he has never touched a tweet. But the fact that he has come out with such an aggressive public rebuke of Besant's actions to bring down long-term interest rates on third-year bonds is enormous. When I say on this show that the bond market is the real daddy, the daddy I'm talking about is Stan. So what actually triggered this? The 30-year Treasury yield, which is basically the interest rate the US government pays to borrow money for 30 years, recently climbed to its highest level in nearly two decades. That is a warning light on the dashboard. It means investors are demanding more money to lend to the American government. And the reason is simple. They're getting nervous about how much debt this country is pining up and whether anyone in Washington has a serious plan to deal with it. Instead of addressing that, the Treasury announced on Wednesday 19th that it would double the size of its long-end buyback operations to $4 billion. In plain English, the government said it would step in and buy back its own bonds in bigger chunks. Buybacks are supposed to be boring plumbing that keeps the market running smoothly. But when you suddenly double them right after the yield hits a 20-year high, the market doesn't see plumbing. It sees a government trying to push a price around. The former Soros fund management colleague of Treasury Secretary Scott Besant said markets were correct to view last week's announcement of a doubling in long-end buyback lots to $4 billion as price management and a mistake in an opinion piece published by The Wall Street Journal on Monday. The Treasury announced the move on Wednesday after the US 30-year yield hit a nearly 20-year high, and it triggered a short-lived rally that soon reversed. Drucker Miller said the long bond yield was the most important price in the world and intervening risked being sucked into even larger buybacks to defend it, as well as damaging credibility by departing from a reputation for a liability. Think about what the reverse was telling you. The Treasury made its big announcement, bonds bounced for a moment, and then sank right back down. That is the market struggling. Investors looked at $4 billion, compared it to a national debt measured in the tens of trillions, and decided it changes nothing about the underlying math. And that is the trap. Once you start defending a price, you can't do it just once. If yields keep climbing, the pressure builds to buy more and then more after that. Until you are deep in a fight, you cannot win. Drucker Miller is not the only one who sees it that way, and other analysts have zeroed in on a second problem hiding inside this strategy. Economist Peter Schiff argues that the government is replacing relatively cheap, long-term borrowing with shorter-term debt that will have to be refinanced much sooner. In his view, Washington is taking a much bigger risk simply to stop long-term interest rates from rising. Schiff does not describe this as a carefully planned adjustment. He calls it a panic move. Take a look at this. First of all, if you look at the average coupon on the debt right now, the longer-duration debt, the debt that's going out from 10 years or longer, the average coupon is 3.44%. Why would you want to refinance that? 30-year rates now were at 5.3. Now they moved down just below 5.2. I think I looked, it was 5.18, and the 10-year is down at 4 or 6 something. But if you've got all this long-term debt locked up at 3.44, why the hell would you want to refinance that with treasury bills at 4%? I mean, that'd be like somebody having a trade mortgage. Maybe they got 25 years left on it, and you've got a 3.5% mortgage. Why the hell would you want to pay that off by borrowing more money and getting a one-year arm? Nobody would be dumb enough to do that except our government. Now, they're not doing it just because they're dumb. They're doing it because they're scared. This is really a panic move on the part of the government. It's a Hail Mary to try to stop long-term interest rates from rising by announcing that the government is going to buy the bonds that everybody else is selling. Remember, they're basically stepping in front of this trade because the market doesn't want treasuries. The market is selling treasuries, and now the US government has decided that it's going to use taxpayer money, basically, to buy the treasuries that everybody else is selling. Schiff says the government is risking higher borrowing costs tomorrow to reduce pressure today. By replacing long-term debt with short-term borrowing, Washington will have to refinance more frequently and potentially at much higher rates. He says officials are doing it because they're scared of what could happen if long-term bond yields continue rising. That is why he calls it a panic move and a Hail Mary. Jacob Rees-Mogg agrees with Peter Schiff that this looks like a panic move. He says America's intervention shows just how concerned Washington is about what is happening in the bond market. Take a look. But we've also seen extraordinary action in the United States which should make us very nervous. When governments intervene in financial markets to prop them up, that is not a good sign. Governments don't do this when markets are healthy and when they're strong. They do it when they're trying to stave off real problems. So in the last week, the Americans thought that the American bond market was in such trouble that they intervened to buy longer-dated bonds. Rees-Mogg's warning is clear. Governments do not normally step into bond markets unless they're worried about something breaking. The intervention may calm yields temporarily but it also reveals how much pressure Washington is under. It supports Schiff's argument that this was not ordinary debt management but a reaction to growing fears inside Washington. If officials are already taking extraordinary action, the problems beneath the surface may be more serious than they are admitting. And that brings us to the part of Druckenmiller's piece that moves from finance into politics. He pointed out that these enlargement operations happen to be scheduled to run right through the final stretch of a midterm campaign. He's not accusing anyone of a crime. He's making a more damaging point than that. It doesn't matter what the intention was. What matters is what it looks like. When the government's debt schedule appears to line up with the election calendar, investors start asking a question you never went asking. Are these decisions being made for the health of the market or for the health of a campaign? Once that doubt is in the room, it's very hard to get rid of. Druckenmiller stated, these enlarged operations happen to run through the final stretch of a midterm campaign, he said. 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. The treasury did not immediately respond to a request for That word credibility is doing enormous work here. The reason America borrows so cheaply, and the reason the dollar sits at the center of the global financial system, is that for 200 years, the US treasury has been the most boring, predictable, reliable borrower on the planet. Everyone knows the rules. Nobody worries about surprises. That reputation is worth trillions in lower borrowing costs over time. And unlike a factory or a gold reserve, you can't rebuild it once it's damaged. Druckenmiller's point is that Washington is spending down a 200 year inheritance to buy a few days of relief the market has already taken back. Here's the panel walking through his actual punchlines, including his blunt warning about what happens to governments that fight the fundamentals. Longtime advocate of entitlement reform pushes back on Besson's moves, especially hard here, and says the steps Besson is taking amount to procrastination, putting off what really must be done to meaningfully address US debt. That means reforming social security and Medicare. That means creating a responsible budget. He lays out how Besson and the government have not only given the game away here, but they, like Trump on trade and Iran, have again misunderstood their power and influence and will quickly learn that they miscalculated and cannot impose their will on others with the might that they think they have. He closes the piece, reminding Besson that he will lose in his efforts to bring down interest rates. Quote, governments defending prices against fundamentals always lose. The only variable is how much they spend before conceding. As he puts it, let the bond market speak. That warning is not just a dramatic line from Druckenmiller. Market analyst Michael McCarthy says history repeatedly proves it. Governments can temporarily push against the market, but they cannot permanently overpower rising debt, inflation, and weakening investor confidence. The irony is that Scott Besson himself worked with George Soros when markets defeated the Bank of England in 1992. Now McCarthy warns that Washington could be setting itself up to learn that same painful lesson. Scott Besson going to need help to do that from a bigger player or someone with a bigger balance sheet like the U.S. Fed who's just recently deleveraged all these long-dated securities. Well direct intervention is very unlikely to work. As George Soros demonstrated to the Bank of England in 1992, as traders demonstrated to the Swiss National Bank in 2015, nobody can hold the market when the fundamentals are running the other way. Now they might bring temporary relief, they might keep interest rates down for a while, but the fundamental growth in debt underlying the U.S. economy means that that pressure remains and it's very likely to burst. And one of the frightening parts of this is the U.S. government via the Treasury might be able to hold yields down for a while, but eventually it will have to give up and it'll be like a dam bursting in the bond market. Well if that dam bursts, what happens? It's financial crisis time all over again because the U.S. government bond issuance sits at the heart of the debt market globally. It is the benchmark and if the benchmark blows up, every market blows up with it. McCarthy's warning explains exactly why Drucker Miller believes Besant would eventually lose this battle. The Treasury might suppress yields temporarily, but every intervention allows the pressure underneath to continue building. If investors keep demanding higher returns to finance America's growing debt, Washington would have to commit increasingly larger sums to hold rates down. Eventually the government may be forced to step back, causing yields to jump suddenly rather than rise gradually. That shock would spread into mortgages, business loans, stock valuations, and government borrowing costs around the world. This is why Drucker Miller is telling Washington to stop fighting the warning and finally let the bond market speak.