Economist Warns Bessent's Bond Buybacks Could Fuel Dollar-Debasement Fears

Treasury Secretary Scott Bessent appears to be heading down a path similar to Japan's, potentially putting pressure on the US dollar, according to economist Robin Brooks, Jason Ma reported for Fortune.

Treasury Secretary Scott Bessent's bond-buyback plan has sparked debate over whether efforts to contain long-term yields could put additional pressure on the US dollar.

In a Substack post, Brooks, a senior fellow at the Brookings Institution and former chief economist at the Institute of International Finance, criticized the Treasury Department's decision to increase buybacks of long-term Treasury bonds.

The announcement came after the 30-year Treasury yield reached its highest level in nearly 20 years.

Although yields initially retreated, they subsequently moved higher again as investors questioned whether the intervention could meaningfully ease pressure in the roughly $32-trillion Treasury market. 

Brooks described the buyback program as financial engineering that does not address the underlying fiscal problem.

He argued that if fiscal policy remains unsustainable while authorities attempt to suppress borrowing costs, the adjustment could increasingly occur through the currency rather than through higher bond yields. 

“When fiscal policy is out of control,” Brooks wrote, governments can take measures to cap yields, but doing so can put depreciation pressure on the currency if investors do not receive the risk premium they demand.

He compared the situation with Japan, where efforts to manage borrowing costs have coincided with prolonged pressure on the yen. 

The Treasury's buyback program is relatively small compared with the overall US government debt market. Brooks estimated that the latest announcement represents about $14 billion in additional purchases, compared with roughly $32 trillion in government debt held by the public. 

Brooks' warning represents one market economist's assessment rather than a consensus forecast.

Other economists have argued that concerns over a dollar-debasement spiral may be overstated and that the US dollar could strengthen if economic growth remains resilient.