No, Bessent did NOT just launch yield curve control

This is the kind of real-time commentary I deliver day in and day out at Real Vision to Alpha and Pro members! Today, as an exception, I make this one available in here, but you need to sign up going forward to stay on top of these daily.

I understand that a few of you want a clarification on how today’s action by the US Treasury impacts my views, and how it rhymes (or does not rhyme) with the thesis I laid out yesterday on the curve steepening being GOOD for the cycle. Fair question, so let us take it from the top.

What actually happened: the Treasury announced that it is at least DOUBLING the size of its liquidity-support buybacks in the 10-20yr and 20-30yr sectors, from 2bn to at least 4bn USD per operation, effective from the 9th of September.. and it happened right after the 30yr printed its highest yield since 2007. The long bond rallied 9bps on the news, the 10yr 6bps. Bessent is in practice revealing his pain threshold: the long-end yield was starting to hurt the Treasury’s own budget math, so he acted. But, and this is the important part, it is NOT QE and it is NOT yield curve control, no matter how many times the usual suspects repeat it. The Treasury is simply using its flexibility to impact supply/demand dynamics across its OWN debt profile.. buying back long paper and funding it with issuance further in on the curve.

Would you call it “yield curve control” if you bought back the fixed-rate loan on your house in order to issue a floating-rate loan instead, because you found the yield curve to incentivize exactly that kind of opportunistic reshuffling of your debt? Of course not. You would call it debt management, and you would probably brag about it at dinner parties. It is the SAME thing the US Treasury is doing.. no new money is created anywhere in that transaction. The debt is rearranged, not monetized.

The only way this turns into actual extra liquidity (of the central bank-created kind) is if the Fed restarts its reserve management purchases of short-term bonds. And here is where it gets interesting: Bessent is clearly hinting that the debt profile will be taken further INWARDS on the curve, and the more he floods the front end with bills and short coupons, the more likely it becomes that the Fed eventually has to lean against it with exactly those purchases to keep money markets functioning. So sure, there is a POTENTIAL liquidity angle in this.. but note the key word: POTENTIAL. It is a second-round effect that requires the Fed to move, and it still has nothing to do with yield curve control.

The four curve regimes, ranked

So how do I think about the yield curve and its impact on the business cycle? I rank the four possible “curve actions” as follows, and I suggest you print the sketch(es) below and tape it to your screen.

The preferred regime, if you want a business cycle that runs HOT, is the bull steepener: a steeper curve where the action is led by the SHORT end dropping in yield terms. You get the credit engine (steep curve = profitable maturity transformation = money creation, see yesterday’s piece) AND you get rate relief for households and corporates at the same time. This is undoubtedly what Trump and Bessent are pushing for internally.. Fed cuts in the front, a long end left alone to breathe.

The second-best regime is the bear steepener, where the long end moves higher than the short end. Less comfortable headlines, but the bank engine still runs.. this is the regime we have effectively been in until yesterday, and it is the regime Japan has been thriving in, as I wrote at length yesterday.

Third comes the bull flattener, where the long end drops faster than the short end. It compresses term premia and real rates, which SOUNDS nice, but it is typically driven by falling growth and inflation premia in the long end.. i.e. the market pricing a slowing cycle, and it starves the curve-driven credit engine. And fourth, dead last, the bear flattener: the short end rising faster than the long end. That is the cycle killer, full stop.. it is the shape that inverted us into every recession you remember.

Sketch 1: The four yield-curve regimes, ranked for the business cycle.. steepeners feed the credit engine, flatteners starve it

Why Gold and Bitcoin outperformed Tech today

It is probably worthwhile quickly elaborating on why today’s action led markets to increase the probability of a bull-flattener regime, and why that in turn is a solid regime for hard/scarce assets such as the metals and Bitcoin. Bessent bought back long bonds and compressed long-term premia.. that is bull-flattening by definition, it is read as term premia compression, and term premia compression means real rates DOWN. Add the potential liquidity wizardry described above (front-end flooding forcing the Fed’s hand on reserve management purchases), and you have the exact cocktail that scarce assets love: falling real rates plus a whiff of future money printing. Hence Gold and Bitcoin up, and hence the small rotation OUT of Tech and into hard assets today.

And here is the nuance that I think most still get wrong about Tech. Technology has historically done well in “yield compression” regimes, because it traded like the ultimate duration asset.. but that era is OVER. Tech has turned into the single biggest CapEx sector on the planet, and it increasingly behaves like a cyclical, real-world manufacturing sector as a consequence. Chips, data centres, power, cooling, construction.. that is INDUSTRIAL activity, and industrial activity needs credit. Which means Tech is nowadays better off with a STEEPER curve that allows the credit creation in the real economy to accelerate, exactly like the banks and the industrials. The duration-asset crown has been handed over to the true scarcity assets.

So, in short: Tech and the real-economy cyclicals (banks, industrials) do best when the curve STEEPENS, which can happen in both a bear and a bull market for bonds.. while the scarcity assets (metals, Bitcoin) do best when there is COMPRESSION of rates and risk premia, which can happen in both a bull steepener and a bull flattener.

Sketch 2: Curve regimes and the asset impact.. the cheat sheet

Note the overlap in the top-left of the sketch: the bull steepener is the ONE regime where everything works at once, because it delivers steepness AND compression simultaneously. So if the Fed cuts and the curve steepens from the front, expect Gold, Bitcoin and the Nasdaq to perform in TANDEM.. that is the regime Bessent is really gunning for. In the bear-steepener regime (the one we lived in until yesterday), expect Tech to vastly outperform Bitcoin and Gold, as the credit engine runs but nothing compresses. And in a bull-flattening compression regime like the one markets sniffed today, expect the scarce assets, Bitcoin and Gold, to outperform Tech.

The bottom line: today changed the probability distribution across regimes, not my thesis. The steepening thesis from yesterday is intact.. Bessent is managing the SHAPE of the supply, not controlling the curve, and his endgame is quite clearly the bull steepener (with a little help from his friends at the Fed). Watch the front end: the more he floods it, the closer we get to the Fed restarting reserve management purchases, and THAT is the moment the tandem-regime begins. Until then, keep the cheat sheet handy and stop calling everything YCC.