Wall Street Loves Its Own

Stocks and bonds are united in their approval for the appointment of Scott Bessent for Treasury Secretary in the incoming Trump administration.  Investors prefer familiar personalities, and while Mr. Bessent was hardly a household name just a few months ago, he was well known in investment circles.  And most importantly, Wall Street loves their own kind – a fellow investor.

This is something we have previously noted with regard to the current Federal Reserve Chair.  When he was first nominated, much was made of the fact that Jerome Powell was a lawyer, not the customary economist.  But that missed the point.  Indeed, while Powell was trained as a lawyer, as a key executive at Carlyle Group he was an investor, not a litigator.  It is quite clear that investors have generally enjoyed having one of themselves helming the Powell-era Fed.

Any new hire comes with a degree of uncertainty, but the jitters are far smaller when he is a known commodity.  As a long-time hedge-funder, he clearly has a deep network of relationships within the financial community.  Before setting off on his own, he was a protégé of George Soros and held senior management roles within his organization.  Although the word “Soros” can be a dog whistle for many on the right, his financial prowess has earned respect across the ideological spectrum.  Bessent has demonstrated that he can offer actionable opinions to both Soros and Trump.  That must require some real skill.

It is important to note that while stocks and bonds both reacted favorably, by midday, large-cap stocks had given back most of their gains while bonds retained theirs.  After opening with nearly 1% rallies, the S&P 500 (SPX) and Nasdaq 100 (NDX) are only barely positive, though the Russell 2000 (RTY) is still about 1.7% higher.  Meanwhile, 2-year note yields are 7 basis points lower and 10-years are down 11bp.  The Treasury market is giving a strong vote of confidence to its future helmsman.

Remember, the Secretary of the Treasury has an outsized role in determining how our deficits are financed.  In practice, that means adjusting the mix between bills, notes, and bonds.  Someone with a demonstrated ability to interpret financial markets will most certainly be a boon for the decision-making process at the Treasury when it comes to refinancing and selling a slew of new obligations to finance our country’s debt and deficits.  That speaks to the bond market’s current optimism.

 But amidst the optimism, something else returned to the bond market – the inverted yield curve.  In September we saw the curve normalize when 10-year yields finally exceeded their 2-year counterpart on a lasting basis for the first time in over two years.  As of now, the 10-year is about 1bp lower again.  To be fair, it’s not as though the difference was all that substantial recently – it maxed out around 20bp – but if the inversion returns, it is not exactly an endorsement for future economic prospects.  But one day does not make a trend.

We are weeks away from the inauguration of the new administration and the Senate confirmation hearings that will follow.  But for now,  investors – at least those in the bond market — are clearly pleased with the prospect of the new Treasury Secretary.