Bessent A Boon For Bonds

WHERE WE STAND – A busy start to the week in terms of news flow, yesterday, and one where Treasuries stole most of participants’ attention.

Gains were seen across the curve, as the long-end outperformed, with both benchmark 10- and 30-year yields both falling over 10bp on the day. The moves came as ‘Mr Market’ looked favourably upon weekend reporting that incoming President Trump will nominate Scott Bessent as Treasury Secretary. Bessent not only represents a ‘mainstream’ pick, particularly compared to some of the other names rumoured to be in the running, but is also a markets man, having previously run numerous funds, including a couple of stints with George Soros.

That said, while Bessent may apparently represent the economic mainstream, his ascension to Treasury Secretary will naturally see him become subservient to Trump, hence limiting the predictive power that any of his prior views or statements may hold.

In any case, Bessent has touted a ‘3-3-3’ policy stance of late – 3% GDP growth, a 3% budget deficit (as a % of GDP), and an extra 3 million bpd of US crude production. Markets, clearly, are taking a positive view of this stance, though it’s worth noting that the US is, as near as makes no difference, already at 3% GDP growth, having notched such a pace or greater in three of the last four quarters. Furthermore, a 3% budget deficit would result in the current deficit being halved, meaning some incredibly politically unpalatable choices would have to be made, while an extra 3mln bpd of crude production would see the US pumping around 16bln bpd, likely running the risk of feeling the wrath of Saudi Arabia/OPEC+ in relatively short order.

Sounds good on paper, then, but all that is likely to be much harder to implement in the ‘real world’. Any Bessent-linked moves, hence, are likely to be a one-day affair at most.

Outside of the Treasury complex, the greenback traded broadly softer on the day, a combination of some of Friday’s outsized gains being pared, coupled with fresh headwinds as a result of the aforementioned gains across the Treasury curve.

This modest softness saw the DXY slip back under the 107 handle – which had marked the top of the 2-year old range – while also allowing the EUR to trade back above 1.05, and cable to (briefly) reclaim the 1.26 handle. I remain bullish on the buck, however, despite yesterday’s slight declines, given the continued ‘US exceptionalism’ theme, along with growing prospects of a USD-favourable policy divergence, as risks around the FOMC outlook become increasingly two-sided into early-2025. Overnight news of Trump planning a 25% tariff on all Mexican and Canadian goods, as well as an additional 10% on Chinese imports, has triggered a knee-jerk bout of USD demand, and could be enough to trigger a more sustained rebound in the buck.

Interestingly, despite a softer USD, there was notable weakness in the commodities space, with both gold and crude (both Brent and WTI) losing around 3% on the day, in an apparent unwind of the increased geopolitical risk premium priced into both prior to the weekend.

The decline in gold, the yellow metal’s biggest daily loss since November 2020, is likely of particular concern to precious metal bulls, especially given the chunky fall in DM bond yields seen yesterday. Furthermore, with gold having gained 30ish% YTD, one questions the degree to which fresh buyers might now step in, as the end of the year comes ever closer.

Lastly, in the equity complex, stocks were choppy, though both the S&P and Nasdaq ultimately closed in the green, albeit some way off intraday highs. That said, the path of least resistance still leads to the upside, with stocks likely to demonstrate their natural positive drift as we progress through a thin Thanksgiving week ahead.

LOOK AHEAD – A busy US data docket awaits today, on what is corporate month-end, owing to Thanksgiving on Thursday, potentially resulting in some supportive USD flows in the mix as well.

Of today’s releases, the latest consumer confidence figures, via the Conference Board, are likely of most interest, particularly as we move towards the pivotal festive spending season; the index is seen rising to 112.0, from 108.7, in a jump that may also be triggered by the election result. Other notable US prints today include the latest new home sales data, and the monthly Richmond Fed manufacturing survey. Minutes from the November FOMC meeting are also out later, though seem unlikely to provide especially much fresh information.

Elsewhere, US supply continues in the form of a $70bln 5-year auction, following on from a well-received 2-year sale yesterday. Said sale stopped-through the when issued by a sizeable 1.8bp, compared to the prior 0.2bp 6-auction average, while also seeing indirect demand rise to 71.6%, its highest level since July, in a sign of participants locking in yield as the Fed continue to lower rates.