Arthur Hayes says Scott Bessent is turning into Janet Yellen thanks to treasury liquidity. Arthur begins his book "Same Same, But Different" with an evening at Pacha Club. Scott, his "Buffalo Bill," faces off against Yellen.
Yellen mocks him because expanding the bond buyback program only calmed yields for one session. Arthur notes that Scott spoke differently than Yellen, yet both aim for liquidity as Washington continues to spend and treasury yields rise. Arthur wrote:
"I saw it. Don't let the haters get you down. The crypto community is with you. You had no choice; we love you. Keep up the good work! Don't stop printing money, because if the markets fall, there will be no freebies for all the rich people and everyone else in America who believes if they just believe in capitalism hard enough they'll get rich too. If there are no freebies, AOC will raise our taxes, oy vey."
Yellen Took $2.4 Trillion Out of Circulation While the Fed Kept Rates Around 5.3%
Arthur will get to work at the end of 2023. Yellen sold more Treasury bills and fewer long-term bonds. Bills mature within one year, so money market funds view them as cash.
These funds could have been used in the Federal Reserve's Reverse Repo Program (RRP), which pays close to the federal funds rate. Treasury bills were supposed to offer a higher yield because Congressional funding disputes could delay repayment.
About $2.5 trillion was parked in the RRP program. Increased bill supply drove yields up, pulling money market cash away from the Fed. By January 20, 2025, when Scott took office, $100 billion was left in the facility.
Arthur believes the $2.4 trillion drop released liquidity into the markets. Bitcoin and the Nasdaq 100 index rose, while 10-year bond yields fell from 5%. Arthur wrote:
"If you don't understand why Bitcoin and risk assets have rallied so hard even as the Fed kept policy rates at their highest since 2008 and simultaneously shrank their balance sheet, then you will miss the next bull market that just began. That is why academics invented the term activist treasury issuance (ATI) to describe the sorcery 'bad bitch' Yellen possessed."
The 5% level matters because the 10-year Treasury yield affects mortgages, corporate bonds, and consumer lending. Arthur says both secretaries want financing costs to stay below that level.
Scott Orchestrates a Buyback, Arthur Watches Bitcoin for the Next Liquidity Wave
For Scott, the issue is federal debt issuance; for the Treasury, it's cheap financing. Bills are easy to sell due to investor appetite for short-term dollar instruments.
Cryptocurrencies connect to this trend through USDT, issued by Tether, and USDC from Circle Internet Group (NYSE: CRCL).
According to Arthur, the Federal Reserve can stimulate demand via a reserve management program involving creating bank reserves and buying bills.
He also says this process is overseen by John Williams at the New York Fed. Scott can sell bills and then use the proceeds to buy back long-term securities.
On August 19, Scott added $20 billion to planned long-term bond buybacks. The 10-year yield fell, and Bitcoin rose for two days, but soon yields climbed above pre-announcement levels.
Arthur argues $20 billion is a pittance compared to roughly $40 trillion in federal debt. Scott also supported broader use of FIMA, allowing foreign holders, including Japan, to borrow Fed-created dollars collateralized by Treasuries instead of selling them. Arthur wrote:
"The best-case scenario for Bitcoin would be for Scott to announce a BoJ-style bond market manipulation where he tells the market he will conduct unlimited bond buybacks of maturities longer than 10 years if the yield goes above 5%. Initially, the 10-year bond would surge, and the yield would drop as the market gave Scott some respect. But, as with all uneconomic market manipulation schemes, the market would test Scott and see if he is ready to back up his words with a dollar bazooka."
Arthur believes small-volume buybacks will occur if stress levels aren't too high, using an MOVE index level above 130 as one indicator.
The Treasury could also drain its general treasury account of about $1 trillion for purchasing purposes.
Arthur expects Bitcoin to continue rising but also sees sharp corrections. He says part-time traders should avoid leverage and hold their crypto positions, watching for the liquidity moves Scott makes.
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