Bessent's $4B buyback risks dollar slide if yields stay above 5%

BofA's Michael Hartnett warned that if Bessent's buyback plan fails to pull the 30-year yield below 5 percent, the dollar could slide and short bets could build on risk assets.

"If Bessent can't pull the 30-year Treasury yield below 5 percent, the dollar could weaken in coming weeks and markets could step up short positioning in high-leverage areas, including AI hyperscale cloud providers and private credit," Hartnett, chief investment strategist at BofA Securities, said.

The warning lands as the 30-year yield hovers near 5.24 percent after the Treasury doubled its buyback operations to at least $4 billion per session, targeting securities maturing in 10 to 30 years. The 10-year yield stood near 4.70 percent, and total federal debt crossed a record $40 trillion this week.

If the plan fails to contain long-end yields, financial stocks could also face short pressure, Hartnett said, raising the risk of broader volatility in equities and fixed income before the November midterm elections. Bessent has said the buyback program could grow beyond $4 billion per operation and that long-term yields "don't reflect the underlying fundamentals."

The expanded repurchases, announced Wednesday and set to begin Sept. 9, target older, less-liquid "off-the-run" bonds in the 10-to-20-year and 20-to-30-year maturity ranges. Bessent told CNBC the program could expand further. "We're going to increase the size of the buyback," he said. "It could be more than the $4 billion per issue."

The intervention briefly stanched a climb in 30-year yields to 19-year highs, but the rally fizzled by Thursday's close as both the 10-year and 30-year yields rose more than 5 basis points. On Friday, the 30-year yield steadied at 5.2508 percent while the 10-year held near 4.7001 percent.

Quasi-QE Faces a 5% Test

Hartnett's framing casts the buyback plan as a form of quasi-quantitative easing, a tool the Treasury has rarely deployed at this scale. Ed Yardeni, president of Yardeni Research, pushed back on the notion that Bessent is trying to force yields lower. "Bessent isn't trying to lower bond yields," Yardeni said. "Rather, he is trying to stabilize them so Treasury auctions go smoothly." Yardeni maintained his forecast for the 10-year yield to stay between 4 percent and 5 percent through the end of 2027.

Bessent, a former Soros Fund Management lieutenant who contributed to the research behind the firm's 1992 short against the British pound, said the Treasury wants to "make a market" in longer-dated securities without targeting a specific yield. He called 30-year liquidity "very poor" and said the administration would announce a fiscal consolidation effort "this week or early next week," with savings of "several hundred billion dollars" possible alongside cuts to waste, fraud, and abuse.

Debt, AI, and the Short-Bet Setup

The $40 trillion debt milestone carries no special significance, Bessent said, arguing the U.S. can "grow our way out of this" through global growth. But the deficit has been pushed up this year by refunds of tariffs the Supreme Court declared illegal, a one-time drag, while a wave of factory and data-center construction is being immediately expensed against corporate profits under the 2025 tax cut act, curbing corporate tax revenue.

Hartnett's short-bet scenario targets the very sectors driving that construction. AI hyperscalers have issued heavily in the long end of the curve to fund data-center buildouts, and Bessent suggested such companies consider shifting toward five-year "belly bonds" rather than high-rate long-dated debt. Willem Sels, global chief investment officer at HSBC Private Bank and Premier Wealth, said the rebound in long-term yields shows markets worry the Fed has become "less credible or predictable" under Chairman Kevin Warsh, though he expects that concern to fade as policy becomes clearer.

Michael Burry, the investor known for the "Big Short," separately flagged the economy's reliance on AI investment, citing Apollo Chief Economist Torsten Slok's data showing traditional rate-sensitive construction weakened after the Fed began hiking in 2022 while data-center spending kept surging. "This is the dependency of the economy on one thing that got us the GFC," Burry said.

If Bessent's plan fails to hold the 30-year yield below 5 percent, Hartnett's warning implies the dollar could depreciate and short sellers could target AI hyperscalers, private credit vehicles, and financials — a setup that could push volatility higher across equities and fixed income into the November midterms.

This article is for informational purposes only and does not constitute investment advice.