Bill Dudley questions US Treasury’s recent market interventions

The US Treasury has long prided itself on one core selling point to the world’s bond investors: we are boring and predictable. Former New York Fed President Bill Dudley thinks that reputation just took a hit.

In a Bloomberg Television interview during the week of August 20, Dudley took aim at the Treasury’s recent decision to ramp up buybacks of long-dated government debt, arguing the move breaks from the department’s traditional commitment to regular and predictable issuance. The intervention came after the 30-year Treasury yield surged above 5.3% in mid-August, its highest level since 2007, essentially forcing the government’s hand.

The buyback gambit

Treasury Secretary Scott Bessent announced plans to expand the long-bond buyback program to more than $4 billion, roughly double its previous size. The goal is straightforward: soak up some of the supply weighing on the long end of the yield curve and ease the pressure on borrowing costs that have been climbing relentlessly.

The awkward part is that the Treasury had just maintained steady quarterly refunding guidance as of early August, signaling no changes to auction sizes through 2027. Weeks later, it was doubling down on buybacks.

A complicated picture for the Fed

Dudley didn’t stop at critiquing the Treasury. He pointed out that these fiscal maneuvers also complicate life for the Federal Reserve, which is trying to calibrate monetary policy against a backdrop of persistent inflation and a labor market that refuses to cool in a straight line.

When the Treasury intervenes to suppress yields, it effectively loosens financial conditions. Having another arm of the government operating in the same space makes it harder to assess whether monetary policy is actually restrictive enough.

Stock market warning signs

Dudley also turned his attention to equity valuations, and the numbers he cited are not exactly comforting for anyone with a 401(k).

The Shiller CAPE ratio, which measures price-to-earnings over a 10-year inflation-adjusted period, sat near 41 as of August. The long-term average is roughly 17. In plain terms, stocks are priced at nearly two and a half times what history suggests is normal.

Then there’s the Buffett Indicator, which compares total stock market capitalization to GDP. It was hovering around 240%, a level that Warren Buffett himself would likely describe as flashing red. For context, the indicator sat around 100% for much of the pre-2000 era. At 240%, the stock market is valued at roughly two and a half times the entire US economy’s annual output.

Dudley characterized the current environment as reflecting bubble-like conditions. That’s not a word former central bankers throw around casually, which makes its use here all the more notable.

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