[Economic Analysis] The Chicken Game Between Besant and the Bond Market... Will the Fed Step In?

The U.S. Treasury has made a bold move to calm the soaring long-term Treasury bond yields.

On the 19th, the Treasury announced that it would more than double the size of its buyback of long-term bonds maturing in 10 to 30 years, increasing it from a maximum of $2 billion per session to at least $4 billion. The expanded buyback will take place from September 9 to November 4. The official reason given is to provide 'liquidity support' to facilitate trading in long-term bonds.

However, the timing of the announcement was concerning. The yield on the U.S. 30-year Treasury bond had surged above 5.3%, reaching its highest level since 2007. Immediately after the buyback announcement, the 30-year yield plummeted to around 5.2%, but the effect was short-lived. By the 24th, it had risen again to around 5.25%.

Treasury Secretary Scott Besant indicated the next day that the buyback size could be increased to over $4 billion.

While the Treasury signaled that it would not simply watch the rates rise, the bond market is not easily backing down. A struggle between Besant and the bond market has begun.

Why Does the Bond Market Demand Higher Yields from the U.S. Government?

In the U.S. financial market, when there is growing distrust in the government's fiscal management, investors often sell bonds to push yields higher. These investors are commonly referred to as 'bond vigilantes.'

It's not a difficult concept.

If investors believe the U.S. government is borrowing too much, they react by saying:

"We won't buy bonds unless you offer higher interest rates."

This underlying anxiety is present despite the recent rise in long-term U.S. interest rates.

The national debt of the U.S. has surpassed $40 trillion, and the fiscal deficit continues. Coupled with high energy prices and inflation concerns, U.S. companies are issuing large amounts of corporate bonds to fund AI data center construction, creating a situation where both the government and corporations are competing for investors' money.

Ultimately, the market's question is simple:

Is it okay to buy the Treasury bonds that the U.S. government will continue to issue at this price?

The Treasury's $4 billion buyback alone cannot eliminate this fundamental question.

Buyback Is Not 'Money Printing'

Here, the most important distinction must be made.

It is not accurate to immediately label this action as 'U.S. quantitative easing (QE).'

The Fed's QE is a monetary policy where the central bank buys Treasury bonds to supply new money to the financial market.

The Treasury's buyback is different.

The Treasury is repurchasing existing long-term bonds that are not actively traded in the market and facilitating trading in the bond market, which is more akin to debt management policy.

In simpler terms, it is not eliminating the debt itself but adjusting the structure of the debt.

It is also possible to increase the issuance of short-term bonds instead of reducing long-term bonds. Therefore, interpreting this action as "the U.S. has started to loosen money again" is excessive.

The problem arises next.

Attempting to Control Rates, But the 'Fiscal Problem' Remains

What the Treasury can solve with the buyback is the trading anxiety in the bond market, not the fiscal deficit itself.

The national debt exceeding $40 trillion remains unchanged, and the amount of Treasury bonds that need to be issued in the future does not decrease.

According to the Congressional Budget Office (CBO), the current statutory debt ceiling of the U.S. is $41.1 trillion, and if the current trend continues, it could reach the debt ceiling again by 2027.

Thus, if long-term bond investors begin to worry about the U.S. government's fiscal condition, it will be difficult to keep rates low by merely increasing the buyback size a little.

In fact, the more the government intervenes in the market repeatedly, the more other suspicions may arise.

"Is the U.S. government unable to withstand even this level of interest?"

If that happens, long-term bond investors may demand even higher yields.

The paradox is that an intervention intended to lower rates could instead heighten market anxiety and push rates higher.

Therefore, the Market Ultimately Looks to the Fed

The Treasury's power has its limits.

While it can change the maturity of bond issuances and expand the buyback size, it cannot supply new liquidity to the entire financial market.

That role belongs to the Federal Reserve (Fed).

Currently, the Fed is led by Chairman Kevin Warsh. Official Fed documents confirm that Warsh will be the chair of the Federal Open Market Committee (FOMC) in 2026.

If long-term Treasury yields continue to rise and bond market anxiety spills over into the stock and housing markets, pressure for intervention on the Fed may also increase.

If the Fed stops reducing its balance sheet or expands Treasury bond purchases again, the narrative will change completely.

If the Treasury buyback is 'changing the structure of the debt,' then the Fed's expansion of Treasury purchases is 'supplying money to the market.'

Thus, the key question in the current market is here:

Can Besant stabilize long-term rates from the Treasury side? Or will Warsh ultimately have to step in?

Chairman Warsh is scheduled to deliver a keynote speech at the Jackson Hole Economic Policy Symposium on the 28th. Given the recent increase in bond market anxiety, market attention is expected to be even more focused.

Bitcoin Is Not Watching the '$4 Billion'

The reason the cryptocurrency market is paying attention to this situation is also here.

It is difficult to see the Treasury buying $4 billion in bonds as a direct catalyst for Bitcoin's rise.

Rather, if long-term Treasury yields remain high around 5%, it could be a burden for Bitcoin.

If investors can receive high interest from safe assets like U.S. Treasury bonds, they have less reason to buy Bitcoin or stocks, which have high price volatility.

The situation changes when the Fed moves.

Fiscal anxiety → Surge in Treasury yields → Shock to financial markets → Fed intervention → Expansion of liquidity

If this flow occurs, the investment environment for risk assets, including Bitcoin, could also change.

What has been repeatedly confirmed in the market since the 2008 financial crisis and the COVID-19 pandemic is Bitcoin's strong 'liquidity sensitivity.'

Thus, cryptocurrency investors are not watching Besant's $4 billion.

They are watching whether the Fed's money follows.

Stablecoins Are More Deeply Connected to U.S. Treasuries

Stablecoins are also connected to the changes in the Treasury bond market.

Under the U.S. GENIUS Act framework, licensed dollar stablecoin issuers can hold reserves in safe assets such as cash or U.S. Treasuries with a remaining maturity of 93 days or less.

This is significant.

As the dollar stablecoin market grows, the structural demand for purchasing short-term U.S. Treasuries may also increase.

If the Treasury moves to reduce the burden of long-term bonds and increase the proportion of short-term bond issuances, the U.S. Treasury market and the stablecoin industry will become more closely connected.

On one side, long-term bond investors are demanding higher yields, while on the other side, dollar stablecoins are growing as new buyers of short-term bonds.

The reason the U.S. views stablecoins not merely as cryptocurrency products but as a global distribution network for dollars and U.S. Treasuries is also here.

Three Things Korean Investors Should Watch

This is not just someone else's issue for Korea.

First is the exchange rate. When U.S. long-term rates rise, the attractiveness of dollar assets increases, which could put upward pressure on the won-dollar exchange rate.

Second is stocks and cryptocurrencies. When U.S. Treasury yields rise, the benchmark yield for financial assets worldwide also increases. This is a burden for domestic stocks and risk assets like Bitcoin.

Conversely, if the Fed shifts direction to supply liquidity again, the flow of dollars and risk assets could also change.

Third is the stablecoin strategy.

The U.S. is growing dollar stablecoins while simultaneously creating new demand for U.S. Treasuries. If Korea approaches the won stablecoin merely as a convenience for payments or a regulatory issue, it may miss the larger strategy that the U.S. is envisioning.

Ultimately, the Core of the Fight Is 'Trust in U.S. Finances'

The essence of this situation is not that the buyback size has increased from $2 billion to $4 billion.

The core issue is how long the market will accept the U.S. government's debt at the current price.

The Treasury can adjust the maturity of bonds.

The Fed can change the amount of money in the financial market.

But neither can eliminate the ongoing fiscal deficit itself.

Thus, what the global financial market is ultimately watching is one thing:

Who will back down first, Besant or the bond market?

And if the last to move is the Fed, then from that moment on, this story is no longer just about U.S. Treasury yields.

Once again, it becomes a global liquidity issue and a matter for the Bitcoin market.

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