The case for believing in a Bessent put

Money market funds could prove critical in efforts to control 10-year yields

The opening salvos of Donald Trump’s global trade war sent 10-year Treasury yields tumbling to a six-month low. US Treasury secretary Scott Bessent wants to keep them there. He has his job cut out.

The idea of a so-called Bessent put in the Treasury market has drawn close attention from the industry, particularly regarding the tools Bessent might use and whether they’ll work.

As Risk.net discovered last month, investors are broadly sceptical about what Bessent can achieve. Possible spending cuts are reckoned to be too small to make much of a difference. A grand bargain with foreign central banks to buy ultra-long dated US bonds seems implausible. This week’s tariff announcement threatens to raise inflation and might, in some scenarios, make Bessent’s job even harder. 

And yet, not everyone sees the Bessent put as pure whimsy. One believer in the idea is Guneet Dhingra, head of US rates strategy at BNP Paribas, who makes the case that Bessent has more firepower than sceptics credit.

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Dhingra has looked closely at how far Bessent can manipulate the supply of 10-year bonds, by choosing to fund the government with greater volumes of short-dated Treasury Bills.

This is a known device, but most in the markets assume it could work for only a brief time. Short-term debt must be rolled more frequently, making it a riskier way to borrow. Future market conditions are uncertain.

Said Haidar, founder of Haidar Capital, told Risk.net last month the insecurity of relying on short-term funding would probably drive the Treasury to issue more 10-year bonds next year.

Dhingra, though, reckons the Treasury could choke off supply for much longer – possibly up to three years. “A lot of investors have simply not done the math,” he says.

Binding constraints

Why Bessent would want to cap 10-year yields is plain.

As the US Federal Reserve cut interest rates by 100 basis points last year, yields on the 10-year US Treasury headed in the opposite direction. Should inflation resurge in the US, the same sorts of moves might be expected again.

And because 10-year yields determine mortgage rates, the effects are keenly felt in the real economy.

Convention says the market’s tolerance for the balance of short versus longer-dated issuance constrains the Treasury’s use of T-bills.

The Treasury Borrowing Advisory Committee – a group of market participants that provides recommendations on issuance plans – has suggested markets would like to see T-bills comprise about 15-20% of total debt issuance.

And T-bills as a proportion of all Treasury debt outstanding reached nearly 22% at the end of 2024.

Dhingra, though, says the true limit on T-bill use is simply the cost to the Treasury of borrowing one way versus another.

It’s given the US Treasury room to continue to fund itself with increasing T-bills. There’s a lot of capacity in money market funds to take that down

Guneet Dhingra, BNP Paribas

Instead of the issuance ratio, he suggests the yield paid on T-bills versus the overnight index swap (OIS) rate could be an alternative benchmark to consider.

If the US government pays above OIS on its T-bills, Treasury’s borrowing starts to look like a bad deal for taxpayers – at which point Bessent would be forced to return to more conventional issuance.

The “fortuitous” news for Bessent is that money market funds that are key buyers of T-bills have expanded rapidly. Assets in these funds grew 24% in 2023 and 15% last year to now top $7 trillion. “It’s given the US Treasury room to continue to fund itself with increasing T-bills. There’s a lot of capacity in money market funds to take that down,” Dhingra says.

To understand what Bessent can really do, then, the metric to watch is the ratio of T-Bills outstanding to money market assets, he argues. That ratio is now 88% – much lower than two years ago. BNP Paribas expects the ratio to move lower still.

How might the Bessent put work? Should the yield curve begin to steepen, the Treasury secretary could simply reaffirm guidance on favouring T-bills over coupons. Coupons are US Treasury bonds with maturities of two years and upwards.

Already, Bessent surprised the market in February by continuing the policy of his predecessor Janet Yellen to do just that, despite Bessent having criticised the approach before taking office. 

In fact, the Treasury softened its language, Dhingra notes. The February refunding statement says the Treasury “anticipates maintaining” coupon issuance, versus the previous quarter’s statement that Treasury did not anticipate needing to increase issuance.

Breaking anchor

Many investors decry the idea that supply and demand does much to determine 10-year yields, saying macro narratives such as inflation expectations or, right now, slowing growth, matter far more.

But Dhingra says the evidence that such technical forces account for big moves in 10-year bond prices is plain – including during periods of heavy macro news flow.

Almost all the increase in yields since Q4 2024 has been in term premia, he points out — the element of bond yields to compensate investors for tying up money for a longer period. Term premia is ultimately a gauge of supply and demand in the Treasury market, Dhingra argues.

As for what this means: BNP Paribas is advocating trades that benefit from the US yield curve remaining range bound.

“It makes it difficult for the yield curve to steepen much. It makes it difficult for the yield curve to flatten much,” Dhingra says. One idea is to sell yield curve volatility using curve options and collect a premium.

There could be broader implications, too. The 10-year Treasury is an anchor in the financial system, a buy-side strategist points out: “If you tinker with it, you’re messing with a major pillar.”

Should the Bessent put prove real, asset allocation decisions might require rethinking. Models that rely on the 10-year yield as a signal could be thrown off track.

Ten-year yields have fallen by about 70 basis points since January amid concern about a US slowdown, so the Bessent put has yet to be tested in any significant way.

That picture may change, though. In such a case, few seem to think the Bessent put will work. Yet investors cannot ignore the possibility it might.