Stanley Druckenmiller, the billionaire investor who mentored US Treasury Secretary Scott Bessent in his early career as a hedge fund trader, suggested his former pupil is making a mistake by wading into the bond market.
Bessent has recently pledged to increase the Treasury’s purchases of long-dated bonds, a move widely seen as an attempt to push down yields in the world’s most important debt market.
That would help contain financing costs for companies and may bolster economic growth – if it works. But Druckenmiller argued in a Wall Street Journal opinion column that policymakers should let the bond market do its job, recalling the lessons he learned during his time as a hedge fund manager.
“Governments defending prices against fundamentals always lose,” Druckenmiller wrote.
It was an unusually public pushback from Druckenmiller, who worked alongside Bessent and George Soros and remains one of the most influential voices on Wall Street. The three were known for taking huge swings on currencies and overseas bond markets, with some of their biggest wins coming from when they bet against the ability of governments and central banks to fight the tide of market sentiment.
The debate comes as 30-year US Treasury yields have risen to levels not seen in almost two decades, reflecting investor demand for extra compensation to own longer-dated government debt. US national debt has topped $40 trillion, raising the stakes for policymakers trying to keep borrowing costs in check even as Washington continues to sell ever more securities.
Druckenmiller’s comments add to skepticism over Bessent’s desire to push down bond yields. Critics have argued that the move makes little economic sense, offering only temporary benefits and not addressing the worries about fiscal spending that have pushed up borrowing costs.
“Bessent should perhaps listen to his mentor,” said Prashant Newnaha, macro strategist at TD Securities. “Druck is dropping truth bombs. He is essentially saying there is no easy fix.”
Bessent’s bond plan is just the latest sign that the former hedge fund manager remains deeply focused on markets. He recently oversaw the first purchases of Japanese yen by US authorities in three decades, and the Treasury has used so-called rate checks to influence currency traders.
Rising Yields
Bond yields can directly affect how much companies pay to raise debt, as well as influencing mortgage costs and other loans. By using all the tools at his disposal to lower these costs, Bessent may be able to partially deliver the lower rates that US President Donald Trump has been demanding from the Federal Reserve.
But Druckenmiller, who now runs investment firm Duquesne Family Office, argued that was misguided.
Instead, he suggested the Treasury’s willingness to attempt to directly push down yields shows it isn’t paying enough attention to how yields signal investors’ confidence in the government’s fiscal position, among other things.
“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,” Druckenmiller wrote. “The long-term Treasury yield is the most important price in the world. It is also the only fiscal disciplinarian the US has left.”
The possibility of the Treasury selling more short-term debt to fund its purchases echoes so-called twist operations sometimes used by the Federal Reserve during times of turmoil. But this kind of bond market management by the Treasury represents a mission creep that has spooked investors.
“A government can sometimes successfully support prices for one asset, only for the pressure to show up somewhere else,” said Gareth Berry, strategist at Macquarie Group Ltd. in Singapore. “Suppressing bond yields can lead to currency weakness, for example. This is analogous to the conservation of energy in physics, where energy can neither be created nor destroyed but only converted from one form into another.”
The Treasury has said that buybacks would provide more liquidity to longer-dated bonds. But Druckenmiller rejected the characterization of the move as liquidity management, saying that it wasn’t necessary — the market is orderly.
He also argued that, leaving aside the broader merits of the Treasury trying to influence yields, it didn’t make sense in context. The 10-year yield sits around the economy’s nominal growth rate, which makes financial conditions accommodative rather than restrictive, he said.
“The bond market wasn’t being a vigilante, as some would argue,” he wrote. “It was being a pushover that had finally begun to clear its throat, and Treasury moved to quiet even that.”
This article was provided by Bloomberg News.