Bessent hires David Zervos, a vocal advocate of lower rates, as the bond market prices another Fed hike

Treasury Secretary Scott Bessent has appointed David Zervos, the longtime chief market strategist at Jefferies, as a counselor in the Office of the Secretary, the Treasury announced Monday. The release cites 35 years in markets, central banking and macroeconomics, including two spells at the Federal Reserve Board: as an economist at the start of his career and as a visiting advisor during the 2009 crisis. It is his third stint in government.

The role does not need Senate confirmation. Zervos told clients he will serve as a special government employee and expects his term to end in April 2027, CNBC reported. He was considered by President Trump for Fed chair before Kevin Warsh got the job in January.

A rate-cut advocate arrives as markets price a hike

What makes the hire relevant to markets is the gap between Zervos's views and current pricing. According to CNBC, he said last year that rates should be "much lower," has argued that Warsh can make room for cuts by shrinking the Fed's balance sheet, and publicly backed Bessent's decision to increase buybacks of some long-term Treasury debt.

The market is pointing the other way. Traders see about a 68% to 70% chance of another Fed increase in October, Kitco reported Monday, after the Fed raised rates this month for the first time since 2023. Treasury yields rose again:

A counselor at Treasury does not set interest rates. The Fed does, and Treasury's levers are debt management: how much it borrows at each maturity and how much it buys back. That is where Zervos's view on buybacks matters. Buying back long bonds trims the supply of the securities whose yields have risen the most. We looked at what those buybacks can and cannot do in Treasury buybacks are liquidity support, not money printing.

Who should care

For borrowers, the 10-year yield is the one that sets mortgage rates and many commercial loans. It hit its highest level since 2007 last week. Any signal from Treasury that it will lean harder on the long end, through buybacks or by shifting new issuance toward bills, is the kind of move bond traders will read as an attempt to cap it. Nothing of that kind was announced Monday, and the release describes the job only as a senior appointment.

The hire also fills out a thinning bench. CNBC reported that seven of Treasury's 16 Senate-confirmed appointees had left as of mid-August, and that Joseph Lavorgna left a similar counselor role in March.

What traders will watch: Treasury's next quarterly refunding announcement for any change in the mix of bills and bonds, the buyback schedule, and this week's PCE and payrolls data, which will do more to move the October hike odds than any appointment. Rates board: 10-year yield chart.

Sources: U.S. Treasury; CNBC on the hire and on yields; Kitco; Treasury daily yield curve. This is market information, not investment advice.