Big, bad bond market

From the Editor I was reminded this week of the famous quip from Democratic political strategist James Carville: "I would like to come back as the bond market. You can intimidate everybody." He may have said this more than three decades ago, but the Trump administration's aggressive response to this week's sovereign debt ructions suggests the bond market remains the one entity no one wants to mess with. This week's sharp selloff in bonds, particularly at the long end of the yield curve, was a global phenomenon, with yields hitting multi-decade highs in the U.S., Europe and Japan. But, as is often the case, most of the focus was on the spike in Treasury yields, with the 30-year hitting roughly 5.34%, its highest level since 2007. The potential catalysts for this "long bond" yield surge are varied, including fears about the U.S. fiscal outlook and the huge debt splurge by AI hyperscalers. But one of the primary causes may be investors' concern – or, more specifically, their confusion – about how new Federal Reserve Chair Kevin Warsh views inflation and how he intends to get it back to the Fed's 2% target. Markets remain unclear about the central bank's so-called "reaction function" – a decidedly uncomfortable position for investors. President Donald Trump's administration is clearly concerned about the rumbles in the bond market, even if the president has suggested Americans shouldn't be. In an attempt to put downward pressure on yields, Treasury Secretary Scott Bessent on Wednesday announced that the government would be doubling its buyback sizes for 10- to 30-year Treasuries to at least $4 billion per operation. The 30-year yield initially responded sharply by falling around 10 basis points – likely reflecting the market's surprise at the announcement – but yields rose again on Thursday. Bessent, in turn, said the buybacks could be upsized further. Ultimately, all this activity is, at best, just a short-term fix. For lasting relief, Washington will almost certainly have to address its mounting debt and deficit issues, something Bessent nodded to by mentioning new plans for fiscal consolidation. That'll be no easy feat, however, given that total U.S. debt just topped $40 trillion for the first time, roughly double where it was when President Trump first entered the Oval Office in 2017, thanks to fiscal largesse by both Republican and Democratic administrations. While Trump's tariffs did initially bring in substantial government revenue, the Supreme Court's decision in February to strike down many of these levies has reversed much of that. The deficit in July hit $432 billion, the highest monthly figure since March 2021, as tariff refunds turned customs receipts negative for the third consecutive month. True, the increase in the total debt load since Trump's first term as a percentage of GDP has been less dramatic than the headline figure: it's currently around 120% of GDP, compared with roughly 102% in 2017, which is less than the 126% clocked during the height of the Covid-19 pandemic in 2020. Still, the combination of elevated policy rates and a higher debt stock has pushed annual interest payments above $1 trillion, meaning bond investors have reason to be skittish. While you might think the spike in yields this week reflected concerns about near-term inflation – especially given that crude oil prices are back above $93 a barrel, as energy investors price in a prolonged Hormuz crisis – market measures of inflation expectations actually remain subdued. That optimism may be misplaced, however. Even though crude oil prices are still well below the intraday wartime high of $126/bbl, the prices of refined products such as diesel, jet fuel and gasoline remain elevated. The U.S. diesel crack, the premium of diesel futures over WTI crude, surpassed $100/bbl for the first time on Monday. Even if there is a breakthrough in the U.S.-Iran standoff – something that seems highly unlikely given that the Trump administration says the two sides aren't even talking – relief for refined product costs is a distant prospect. With global inventories depleted and refineries in the Gulf and Russia damaged extensively, the global energy shock is far from over. Meanwhile, President Trump appears to believe that Iran is increasingly vulnerable to economic pain – something that Reuters reporting suggests could be the case. He's seeking to ramp up the pressure by threatening economic penalties on countries that provide "any type of lifeline to Iran," and Secretary Bessent is expected to announce "the toughest sanctions in history" (in his words) on Tehran next week. Moving over to equities, global stock markets were mostly weak amid the bond market pain. In the U.S., chipmakers led tech stocks lower on Tuesday, while a rare earnings miss from retail giant Walmart on Thursday fueled concerns about U.S. consumer strength. In notable single-stock moves, leading Chinese humanoid robot maker Unitree saw its share price spike nearly sixfold on Wednesday after its debut on the Shanghai exchange. Stateside, shares in pharma giant Moderna nearly trebled after the announcement of a cancer vaccine breakthrough with Merck that experts say could change how the disease is treated. Looking to next week, Nvidia is set to report second-quarter earnings on Wednesday, but market headlines will likely be dominated by the Fed's annual symposium in Jackson Hole, Wyoming, which begins on Thursday. Minutes of the Fed's July meeting released this week suggest the policymaking body is a bit more hawkish than the 6-3 split vote suggested, with "several" members appearing ready to raise interest rates. The Fed will get some additional data to chew on when PCE inflation figures for July come out next week. If these numbers suggest inflation is heating up again, don't rule out a surprise rate hike in September.

Big, bad bond market

Bond market selloff rattles markets

Treasury buybacks and debt pressures

Energy prices, equities and next week's Fed focus

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