The whiplash-inducing, “Hunger Games”-style race to become Donald Trump’s Treasury secretary made it easy for the media to ignore what has been going on with Janet Yellen — and the absolute mess she’s leaving for her successor.
Yellen — who, it was revealed Friday, will be replaced as Treasury secretary in January by hedge fund mogul Scott Bessent — was Joe Biden’s pick to run the office that is essentially the country’s CFO.
Indeed, it could be the most important cabinet position in the White House given the importance of the US economy. Americans put Trump in office largely over his handling of the economy during his first term — job growth and wages that kept place with a low inflation rate.
Despite her gold-plated résumé, Ivy League degrees, and time served as Fed chair, Yellen gave the country just the opposite. Her boss paid the price politically as the American people paid the price economically.
And according to my sources, the American people aren’t done paying the price for Yellen’s mismanagement even if most of the financial media is overlooking the fiscal time bomb she devised — one that could blow up once Trump takes office.
Specifically, my sources who follow the bond market say Yellen has been setting a trap for the incoming Trump administration through the way she financed the massive $1.8 trillion federal budget deficit that exploded during the Biden years with the accumulation of $36 trillion in debt.
Yellen has been moving away from long-term debt to finance the shortfalls to shorter-dated securities, essentially rolling over deficits with more and more Treasury bills instead of the normal way of debt issuance through 10- and 30-year debt.
That’s according to an analysis by Robbert van Batenburg of the influential Bear Traps Report, who estimates that around 30% of all debt is the short-term variety — aka 2-year and shorter notes — compared to 15% in 2023.
Didn’t lock in low rates
In an era of low interest rates, Yellen & Co. could have locked in relatively cheap interest payments for years by issuing more 10- and 30-year debt.
So why go there? Politics, according to Yellen’s Wall Street critics.
Because the Biden administration has taken spending to new and some say unsustainable levels, Yellen needed to engage in a bit of financial chicanery to keep interest rates low and not spook the stock market during an election year, her critics say.
If she had financed deficits with 10- and 30-year bonds, that would have caused a rise in interest rates that impact consumers, i.e. mortgages and credit cards.
Yields on the 10-year bond have remained under 5%, a key level that has coincided with a run-up in stocks. If rates move to 5% and above, it would also probably cause a decline in the stock market because stocks would be competing with higher-yielding super-safe treasuries for investors’ money.
She was playing with additional fire because rates on short-dated debt, while low, began to spike in recent years when the Fed raised its base rate to fight inflation.
As van Batenburg puts it: “The Treasury now faces a substantial volume of short-term debt maturing annually, which must be refinanced at significantly higher interest rates. Current market rates for short-term debt, while slightly lower than recent peaks, remain elevated compared to historical levels. This mismatch between low-cost historical debt and high-cost replacement debt is driving a substantial increase in the government’s interest expense.”
Scary stuff. Average Americans got screwed by inflation and then higher rates that made homeownership less affordable. Rich people luxuriated in gains from higher financial-asset prices. But yields on the 10-year have been inching up to that danger zone of 5%.
It could set the stage for a stock market collapse or even worse if the bond market starts to factor in not just higher deficits given Biden’s spending spree, but also the need to issue more long-dated debt because short-term borrowing is more expensive.
Thanks, Janet.
Gensler’s SEC land mines
Speaking of cleaning up messes, SEC Chairman Gary Gensler announced last week he doesn’t plan to stick around until his term ends in 2026.
His replacement is still in question as this column goes to press, though sources say long-time securities lawyer and ex-SEC commissioner Paul Atkins has the inside track.
While Wall Street’s top cop won’t face the same existential worries being faced by the new Treasury secretary, it won’t be a cakewalk, either.
“Cleaning up after Gensler is like avoiding land mines left behind by the retreating Japanese soldiers,” an SEC insider told me.
Gensler, during his three-plus years as Biden’s SEC chair, basically defied the agency’s congressional mandate. He turned what’s essentially an investor-protection agency into a climate-activist arm of the Biden administration by trying to impose costly and absurd disclosures on public companies about their carbon footprint, nearly impossible to accurately gauge.
His enforcement arm became a de facto regulator of the $3.5 trillion crypto business; instead of setting clear rules for the industry, he brought cases, stifling innovation of all-important blockchain technology in the US and pushing it overseas. Staff morale is at an all-time low due to Gensler’s brusque management style.
I can go on, but I don’t want to scare whoever’s taking Gary’s place.
