Bescent’s debt dilemma

good morning. Tesla announced yesterday that it recalls most of its cybertook despite the useful suggestion that commerce secretary Howard Lutnick’s investors would buy stocks. However, another Elon Musk Company, X, and Née Twitter have returned to its original $44 billion valuation after falling to an estimated less than $10 billion during the last year. Are masks better on social media than cars? Email: robert.armstrong@ft.com and aiden.reiter@ft.com.

Scott Bescent’s debt expiration issue

Treasury Secretary Scott Bescent has a lot of options this year.

Before taking office, he and some of Donald Trump’s other economic advisers criticized his predecessor, Janet Yellen, for his handling of the financial market. Yellen shifted the Treasury mix of issuances towards short-term invoices, moving away from long-term bonds. It was “quantitative mitigation by another name,” critics said. In a widely distributed paper, Economic Advisory Council Chairman Stephen Milan argued that by issuing more short-term treasury departments, it would artificially lower long-term yields, allowing the government to create a bigger deficit and stimulate the economy without bondholders.

But two months after his term, Bescent is doing exactly what Yellen did. In a recent interview, he said he would maintain bias against the bill, saying changes in the maturity of his debt profile “will depend on the path.” In fact, he’s doubled. Treasury forecasts show that even if debt is expected to increase, there are divisions that maintain the amount of future Yellen’s long-term debt, rather than the share of the issuance. “In comparison, he’ll have even less long-term debt than Yelen,” says Darrell Duffy of Stanford’s Graduate School of Business.

There are two interpretations of Bessent’s decision. First, as many have argued, issuing a higher percentage of short-term debt was by no means a big deal. Second, his criticism of Yellen was valid, but Bescent is now working under the same pressures she did. The Trump administration may have to expand its borrowing this year to pay for the tax cuts. Bessent may want to use the Yellen strategy to calm the market while it happens.

But there is tension here. Investors are worried about the size of the deficit. This is rising rapidly while interest payments are inflated. If the deficit does not fall, or if inflation heats up again for other reasons, a secular trend in Treasury yields is possible. Certainly, this is something many analysts expect not only in the US, but in most wealthy countries. In that case, the Treasury would regret not issuing longer-term debts at today’s rate.

And there are potentially bad scenarios. If you have a political impasse on fiscal policy or bond buyers, if you are alking with Trump’s fiscal plan (has someone said vigilantes?), bond yields could rise significantly. That’s exactly what could happen, as the Treasury needs to issue debts quickly to avoid default. If so, they will face even higher borrowing costs.

In short, if Yellen and Bessent believe they are engaged in “QE by other means,” they likely lowered yields in the short term at the expense of not sacrificing stable, long-term funding that could result in an attractive rate.

It is possible that Bessent’s hands are already tied up. If he moves to long-term issuance, the market may revolt. Investors are currently running away from the period.

Bessent also works under time pressure. The Treasury is quickly burning its Fed accounts and could be empty this summer. However, new obligations cannot be issued until the debt cap is lifted or suspended. This means that many new issues need to continue as the ceilings get out of the way. It would be a good opportunity to expand the maturity profile of national debt if the market accepts it.

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Customs, corporate guidance, revenue estimates

The stock market runs on expectations. What will your profits be for the next quarter, the following year, and the next five years? There are two parts to the machine that sets expectations. The goal is to earn revenue targeting what a company says about the future (known as “guidance” in transactions) and financial analysts hear what the company says and collectively establishes it (known as “consensus estimates”). Stocks will rise with strong guidance, increased consensus estimates, estimated performance, and fall to the other side.

Guidance is the primary. The main input to estimates of what analyst companies will acquire is that they say they make money either directly or insinuate. So Wall Street Number Crunch has sought to model the impact of tariff revenue, a moving target as policy evolves, but I will predominate it mostly until I say what companies should think.

So what did the companies say? The S&P Global Corporate Credit Research team led by Gareth Williams read quarterly comments from 533 global companies trying to understand this. After all, companies aren’t saying much, or at least not very useful. He summed it to me as follows:

After reading the 533 income call, the one thing that really popped up on me was that tariffs were little guidance. . . So the worst-case outcome leads to a huge wave of revenue revisions. The second is reducing the size of the adjustments we have already seen in localizing our supply chain, particularly for US companies, to reduce production exposure to China. Third, it appears that companies are very optimistic that they can raise tariffs via prices. This means inflation.

This is not surprising. Businesses have not included tariffs in their guidance on the very good reason that they don’t know what tariffs will turn out as the Trump administration continues to change their minds. Some companies, such as Walmart, are simply ignoring the impact of tariffs when setting 2025 targets. Others do their best they can with the information they have. For example, I’m talking about burrito chain chipotle at the beginning of February.

Our guidance does not include the impact of new tariffs on items imported from Mexico, Canada or China. It sources about 2% of its sales from Mexico, including avocados, tomatoes, limes and peppers. Less than 0.5% of sales from Canada and China. If the recently announced tariffs are fully effective, there will be a continuing impact of approximately 60 basis points (0.6 percent points) on our sales costs.

These will be delighted by analysts. If you do arithmetic, you will see that this guidance implies a 25% tariff in the three countries mentioned. But will tariffs be at that level? I don’t know Chipotle, you don’t know, and President Trump doesn’t know.

Why is this all important? Sooner or later, tariffs become guidance, and if that happens, consensus expectations will likely fall, and perhaps because stock prices will need to adjust. According to Factset, the current consensus expectations for the S&P 500’s 2025 revenue growth are 11%. But if it is primarily a pre-paid number, it must go down. Citigroup equity strategist Scott Croner is:

Many analysts expect to be waiting for administrative guidance to model tariffs. . . The complexity of individual companies makes the modeling tariff impact more difficult than expected. Second, the reporting period for Q1 appears to exhibit a negative correction bias, such that the total consensus estimate is likely to be lower all year round.

That’s a bad thing, isn’t it? And in fact, the percentage of estimated revisions, which are upward revisions, has recently been declining sharply. This chart is from the Chronert team.

But it doesn’t have to be that bad. First of all, analysts may be tweaking numbers even if they don’t have the support of the company simply because they are conservative. Three months ago, S&P was expected to grow by 14%. And of course, the US market you may have noticed may be down recently, but it may go ahead of the analysts on this. Chronert also argues that lower uncertainty could lead to a rise in stock prices when revisions arrive. As I said in this field before, it’s clear that this market is really desperate.

One good read

A new mystery of the universe.

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