Public Finances: The Rule of Three Revisited

3/3/3: this was the catchy concept Scott Bessent used to set out his objectives shortly after being appointed US Treasury Secretary. The idea was simple: 3% growth, a 3% deficit and an additional 3 million barrels per day of oil production. A year and a half later, however, the numbers are unfortunately falling short, with GDP growth running at less than 2% over the past six quarters, oil production broadly stagnant (+0.3 mb/d since 2024) and, above all, a deficit almost twice the target. This slippage has not gone unnoticed by bond-market vigilantes, with US government bond yields coming under significant pressure. At the same time, the Treasury took advantage of the summer lull to intervene in this market, prompting investors to question what options it may pursue next and what the implications might be.

More specifically, on 19 August, the Treasury announced through its Secretary that it would double the amount of government bond buybacks at the long end of the US yield curve, to USD 4 billion across maturities ranging from 10 to 30 years. The operation will run until 4 November, when further guidance will be provided, with the stated objective of improving liquidity management in these Treasury issues.

However, the unprecedented nature of the operation inevitably raises questions about its timing. Over the two months preceding the announcement, the 10-year Treasury yield had risen by 25 basis points to 4.70%, while the 30-year yield had climbed by 40 basis points to 5.30%. Against this backdrop, investors immediately picked up on the signal sent by Mr Bessent, pushing long-dated yields down by around 10 basis points after the announcement.

Unfortunately, the decline proved short-lived, with yields resuming their upward trend from 26 August onwards. To explain the move, some commentators have pointed to the limited amounts involved in the Treasury operation compared with the scale of the Federal Reserve’s purchases during the quantitative-easing era. Yet beyond this factual comparison, the fundamentals underpinning the Treasury market remain unchanged: inflation has been above the Fed’s target for 65 months, AI-related corporate bond issuance is surging and creating additional competition for capital, and, above all, the budget deficit continues to deteriorate. The CBO* has revised its deficit forecast higher, reflecting a combination of rising expenditure — notably military spending and debt-servicing costs — and declining revenues, due to a lower corporate tax rate and weaker tariff receipts. All these factors tend to push up the term premium.

This premium, which investors demand in return for holding long-dated bonds rather than continuously rolling short-term paper, is not directly observable on market screens and must therefore be inferred from econometric models. The models used by the Fed point to an average level of around 1%, compared with zero in 2023. Over a shorter time horizon, the premium is probably also being supported by the approach taken by the new Fed Chair, Kevin Warsh. Since taking office in May, he has systematically broken with his predecessor by deliberately keeping his cards close to his chest. In his two post-FOMC appearances, he restricted himself to broad observations, while at the same time deciding to dispense with the forward guidance** so valued by investors and to modify the Fed’s analytical framework. These changes are making the task of assessing monetary policy more volatile for Fed watchers.

It will be instructive to see how investors interpret the Treasury’s signal over time. In the meantime, Stanley Druckenmiller, one of Scott Bessent’s mentors, has already made up his mind. Druckenmiller published an op-ed in the Wall Street Journal arguing that the initiative is doomed to fail because “governments that try to fight fundamentals always end up losing.” The question remains whether the Treasury Secretary truly intends to enter into a confrontation with the markets — and, above all, what weapons he would be prepared to use. Several options are available, with the most extreme involving implicit control of the long end of the yield curve as part of a broader strategy of financial repression.

In the shorter term, this twist operation*** will mechanically shorten the average duration of outstanding Treasury debt. Beyond this technical aspect, however, without any meaningful fiscal consolidation, the US government’s financing requirements will remain considerable, as will the supply of bonds coming to market.

Against a backdrop of erosion in the risk-free status of US government debt — and, more broadly, of sovereign bonds as an asset class globally — directional buy-and-hold strategies appear less suitable than a more flexible approach. In addition, the current environment should encourage investors to revisit the theme of tangible assets, with gold foremost among them. Historically, gold has been one of the major beneficiaries of fiscal disorder. The yellow metal therefore appears to be a strong candidate for portfolio diversification, particularly as positioning is now significantly less consensual, judging by the latest survey of the financial community****...

* The Congressional Budget Office raised its forecast for the federal deficit by USD 200 billion to more than USD 2 trillion for the fiscal year ending in late September.

** Monetary-policy outlook provided during the post-FOMC press conference.

*** Issuance of short-term securities to finance the buyback of long-dated bonds.

**** According to Bank of America’s latest survey, gold is no longer among the five most crowded positions.

Pierre Pincemaille, General Secretary of Investment at DNCA. This article was finalised in September 11th, 2026.

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