Iran war triggers inflation; how to lower U.S. Treasury yields? Bessent doesn’t have many cards left this time.

Iran war triggers inflation; how to lower U.S. Treasury yields? Bessent doesn’t have many cards left this time.

U.S. Treasury Secretary Bessent is facing the most severe market test since taking office—benchmark Treasury yields continue to rise, putting downward pressure on the economy and leaving his policy toolbox with limited options.

Since the U.S. launched military action against Iran at the end of February, the 10-year Treasury yield surged by more than half a percentage point in about 12 weeks, and the 30-year yield hit its highest level since 2007 last week. Inflation pressures have intensified sharply with rising energy prices, and two weeks ago, the U.S. April CPI came in above expectations at a 3.8% year-on-year increase, the highest since June 2023, further exacerbating selling pressure in the bond market.

Two weeks ago, Bessent characterized the current rise in yields as a “temporary” phenomenon, believing that once the Iran conflict ends, inflation concerns will quickly dissipate. However, most market analysts believe that, with the war ongoing and the outlook for deficits worsening, the Treasury’s options are extremely limited and there is no "quick fix" in the short term.

Limited toolbox, high risks of early intervention

Externally, Bessent has long played the role of "volatility suppressor." Morgan Stanley Investment Management portfolio manager Vishal Khanduja described him as a "vol seller"; Trump himself commented last October that "he can calm the markets."

During the Treasury sell-off in April this year, Bessent stated the Treasury holds "a large toolkit that can be deployed," including increasing repos of specific securities. Market participants also mentioned another option: reducing the issuance of long-term Treasuries.

However, both approaches face clear barriers. The next regular update on debt issuance strategy will not be released until August 5, and any early action could resemble the Fed’s "unconventional rate cut," potentially sparking panic among investors over Treasury underlying concerns.

Deutsche Bank rate strategist Steven Zeng pointed out that the Treasury's repo plan is not designed to address market pressure, "I find it hard to imagine this tool being used to suppress yields"; he also warns that announcing policy adjustments outside of the regular quarterly refinancing statement "could backfire—I think it would scare the market."

Dual pressure from inflation and deficit, rendering the 'Bessent Put' ineffective

J.P. Morgan Asset Management portfolio manager Priya Misra explained that the so-called "Bessent Put" refers to the market’s belief that the Treasury can shift debt issuance toward short-term bonds, thus lowering long-term yields. “But with deficit outlook rising and energy price shocks making it difficult for the Fed to cut rates, this operation is very difficult.”

Fiscally, the U.S. budget deficit narrowed last year, but due to increased defense spending and declining net tariff income, the deficit is expected to widen again this year. In terms of monetary policy, although most expect new Fed Chairman Kevin Warsh to favor rate cuts, at the Fed’s April meeting, most officials already signaled: if inflation stays above the 2% target, it may be necessary to discuss raising rates. Even before the war, inflation was already significantly above that target.

DWS Americas Head of Fixed Income George Catrambone bluntly stated: "The bond market has already recognized the Iran conflict and started pressuring for a rebound. I don’t think Scott (Bessent) has a ‘quick fix’ in hand."

He said that for the 10-year yield to return to pre-war levels, there are likely only two paths: resolving the Iran conflict and restoring the energy supply chain, or economic downturn signs prompting the market to price in a Fed rate cut.

Bessent's market reputation endures, but this challenge is different

Bessent’s series of actions since taking office have indeed demonstrated flexibility in responding to the market:

  • Last April, when the Trump administration announced global reciprocal tariffs that sparked a Treasury sell-off, Bessent cooled the market by touting "normal deleveraging";
  • Last October, Bessent helped support the peso by designing a swap arrangement for Argentina;
  • This January, Bessent authorized a rate check on the yen, surprising veteran Japanese traders;
  • This March, during a surge in oil prices, the U.S. Treasury reportedly discussed whether to directly intervene in the oil market, with an unprecedented proposal to directly "trade" crude oil futures.

Hari Hariharan, Chief Investment Officer of NWI Management, commented that Bessent "has an accurate grasp of market pulse and a keen sense of contagion pathways."

However, this situation is different from the past—the factors driving yields higher span geopolitics, inflation, and fiscal deficits, and cannot be solved by a single variable.

Last March, Bessent stated clearly at the New York Economic Club: "We want to focus on 10-year yields and think about what the government can do to bring them down." But since that statement, yields have not fallen—instead, they've risen, suppressing mortgage rates and dragging the housing market.

Zeng summed up simply: "The Treasury’s options are quite limited."

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