Treasury Secretary Scott Bessent appears to be heading down a path similar to Japan’s, and it signals “debasement” of the dollar, according to a top economist.
In a Substack post on Thursday, Robin Brooks, a senior fellow at the Brookings Institution and former chief economist at the Institute of International Finance, sounded the alarm on the Treasury Department’s plan to increase buybacks of long-term bonds.
The announcement came after the 30-year yield hit the highest level in nearly 20 years. While yields briefly retreated, they soon climbed back to their earlier levels as Wall Street doubted Bessent’s ability to hold back the $32 trillion Treasury market.
Brooks dismissed the buyback scheme as mere financial engineering that doesn’t address the mounting stress in the Treasury market. At the same time, it also confirmed there’s no desire to tackle the underlying problem of the deficit, which is on track to reach $2 trillion this fiscal year.
“When fiscal policy is out of control, governments can obviously do many things to cap yields, but this just puts depreciation pressure on the currency because markets don’t get paid the kind of risk premium they desire,” he wrote. “What would be a debt crisis thus morphs into a currency crisis, which is why the Yen has been falling for so many years.”
Brooks has long highlighted Japan’s efforts to keep its bond yields artificially low as a way of keeping its massive debt burden, which tops 200% of GDP, in check. With markets unable to price Japanese debt properly, investors have sent the yen lower.
Similarly, the Treasury’s buyback plan caused the dollar to tumble in what Wall Street has dubbed the return of the “debasement trade.” That was accompanied by a jump in precious metal prices, as investors anticipate further dollar devaluation.
“Markets are primed for Dollar debasement to resume and — as Japan shows — it can be next to impossible to stabilize a currency once it enters a devaluation spiral,” Brooks warned. “The U.S. is playing with fire with this buyback.”
Jonas Goltermann, chief markets economist at Capital Economics, said in a note Thursday that debasement trade worries are overblown and predicted the dollar with strengthen in the coming months on the back of the robust U.S. economy.
The dollar’s recent drop was also consistent with differences in yields versus doubts about U.S. credibility on fighting inflation, he added.
“That said, if the steady stream of unconventional policy ideas continues, that may well change,” Goltermann said. “As such, we are becoming less convinced that the dollar will rebound as far as our current forecasts imply over the coming months, even if we are right that the US economy will pick up more momentum over the coming months.”
The run-up in Treasury yields that preceded the Bessent’s debt buyback plan is a necessary normalization from the earlier era of near-zero levels instead of a crisis or market dysfunction, according to Lawrence Gillum, chief fixed income strategist for LPL Financial.
He pointed out that rate volatility remains subdued, inflation expectations are still anchored, and bond auctions continue to draw enough demand.
Still, Gillum expects long-term yields to continue climbing, given the steep budget deficit the U.S. is running as well as all the fresh debt being issued from the Treasury and AI hyperscalers.
That means the yield will likely become front and center again, prompting more actions like the buyback, even if it’s more a symbolic Band-Aid than an actual fix.
“But it is a reminder that the Treasury Department is paying attention and will do whatever it can to keep yields from getting too high too quickly,” he said.
