{"text":[[{"start":5.44,"text":"The countdown has started to November 3 — and bond investors need to start paying attention. But that is not just because of the looming US midterm elections."}],[{"start":14.16,"text":"As luck would have it, on the very next day the US Treasury will publish its next quarterly issuance plan. And this is expected to accelerate an existing trend to use more short-term funding for America’s $40tn debt, probably by slashing — or even ending — sales of 20-year Treasuries and/or more buybacks of long-term debt."}],[{"start":33.56,"text":"Or to put it in financial terms, US Treasury secretary Scott Bessent appears to be reducing the average weighted maturities of Treasuries. These currently stand under six years (compared to 13 years in the UK, or around eight years in Germany, France and Japan). This is akin to a household using credit cards instead of a mortgage for its debts."}],[{"start":53.3,"text":"Is this a good idea? Many critics would howl “no” — and note that Bessent’s move seems highly hypocritical. After all, in May 2024 he slammed his predecessor Janet Yellen for shortening debt maturities, arguing (quite correctly) that this makes a country dangerously vulnerable to rate swings."}],[{"start":70.96,"text":"Now, however, he seems to be changing his tune. One reason, Treasury officials tell me, is that — unlike with credit cards — short-term rates are currently lower than long-term ones. Another is that recent structural shifts in finance are boosting demand for short-term debt."}],[{"start":86.76,"text":"The fast-expanding stablecoin sector, for example, is gobbling up short-term dollar debt — and now holds more Treasuries than Saudi Arabia and Germany combined. The maturity of debt bought and held by the Federal Reserve is also declining."}],[{"start":99.82,"text":"And foreign investors are tilting short-term too, either because they are wary of making long-term bets on the US or because of foreign hedge fund trading strategies. Indeed, Fed research shows that hedge funds doubled their US debt holdings between 2023 and 2025, and now control about 8.5 per cent of the market — more than the official holdings of Japanese, Chinese and Saudi Arabian investors combined. This is remarkable."}],[{"start":123.84,"text":"Then there is another factor apparently driving Bessent: his view on the economy. Most observers blame this year’s surge in yields on inflation, fiscal worries, strong(ish) growth data and high bond issuance by tech groups; as the Dallas Fed has noted, this may be causing some “crowding out”."}],[{"start":142,"text":"However, Bessent believes that high energy prices are transitory, like the frenetic AI issuance, and that AI will soon boost productivity in a way that enables the US to grow out of its debt. Thus he thinks that long-term market rates are mispriced and wants to exploit that — or “arbitrage” it, to use the jargon familiar to Bessent, who was once a hedge fund trader and still acts and thinks like that."}],[{"start":165,"text":"Or, to return to what Bessent previously criticised Yellen over, he is using an “activist” arbitrage to calm bond markets — ironically, far more so than she did."}],[{"start":175.28,"text":"Indeed, his activism goes way further than mere maturity shifts: since taking office, he has changed regulations to encourage US banks to buy more bonds, backed the growth of stablecoins, taken action to discourage the Japanese from reducing their Treasury purchases and bought back old bonds in a bid to lower yields."}],[{"start":193.88,"text":"And Bessent may yet turn to other tools. He could ask the Fed to restart quantitative easing (although this would probably be resisted by Kevin Warsh, the new Fed chair, who dislikes QE and has cannily asked an external panel to review the Fed’s balance sheet)."}],[{"start":208.72,"text":"Bessent could also use America’s gold holdings to back bonds, or revalue the gold to flatter its accounts. That sounds outlandish. But investors should note that he has recently made Judy Shelton an adviser; she is a passionate campaigner for a gold peg."}],[{"start":223.36,"text":"So will all this activism work? Last year it did: Bessent kept 10-year yields below 4.5 per cent, for which he deserves credit, in my view. But his tactics appear to be losing their force: when he recently increased long-term debt buybacks, yields actually rose."}],[{"start":239.02,"text":"No wonder, perhaps. The one piece of “activism” that Bessent has not unveiled yet is a serious effort to tackle the root cause of the bond market woes: although he has announced a target deficit equivalent to 3 per cent of GDP, the IMF expects it to top 8 per cent this year. Gulp."}],[{"start":257.68,"text":"A debt-cutting plan would be one response to this. Or he could have used his bully pulpit to call for a bipartisan fiscal reform initiative like the one the “Gang of Six” senators unveiled back in 2011. Instead, Bessent is acting as if America can avoid hard fiscal choices by using clever market arbitrage, endless AI optimism — and its exorbitant privilege."}],[{"start":280.6,"text":"Maybe it will work for a while. But if inflation and debt keep rising, or AI optimism collapses, the danger of short maturities will swell. All eyes then on early November; it will be an important signal about America’s future, in every sense."}],[{"start":296.52,"text":""}]],"url":"https://audio.ftcn.net.cn/album/a_1792840946_2599.mp3"}