By Long Yue
U.S. Treasury Secretary Bessent tried to steady the bond market last week, but the move failed to keep long-term Treasury yields down and quickly pushed trading pressure into other assets.
Bessent said the Treasury would at least double the size of its buybacks of long-dated U.S. government bonds in an effort to contain a steady rise in long-end yields. The market reaction was immediate, but it lasted for less than a day. Yields then climbed back to prior levels and finished the week broadly unchanged.
In a later interview, Bessent said the market had been “a little overreacting” and added that the Treasury had a “powerful toolbox.” Price action pointed elsewhere. The dollar fell nearly 1% over the week, gold moved above $4,600, and bitcoin rose more than 25% on the week.
Charlie McElligott of Nomura called that pattern a “pressure release valve,” saying that official attempts to stabilize long-end rates did not remove investor anxiety. It simply resurfaced in other trades.
Focus shifts to Warsh
The handoff has now moved to Federal Reserve Chair Warsh, who is scheduled to speak Friday at the Jackson Hole Economic Policy Symposium.
Since taking office in May, Warsh has offered little in the way of forward guidance. His comments after the last Federal Open Market Committee meeting triggered a sell-off in bonds, leaving markets highly sensitive to both the content and tone of his next appearance.
According to Bloomberg, traders want to know how the Fed’s reaction function works at a time when inflation remains stubbornly above the 2% target and the fiscal outlook keeps worsening.
Molly Brooks, U.S. rates strategist at TD Securities, said: 「If it’s more of the same, I think the market will be disappointed, and that could intensify the long-end selling we have already seen.」
Dhiraj Narula, a rates strategist at HSBC, said Warsh still has room to calm markets through his messaging: 「If Chair Warsh can characterize potential inflation pressures, that alone, in our view, would be enough to provide some basis for reducing the uncertainty-related term premium.」
Michael Ball, a strategist at Bloomberg Markets Live, said Bessent can alter the maturity structure of government debt, but only the Fed can anchor inflation expectations. In his view, Warsh’s Jackson Hole speech needs to restate that the 2% target remains achievable and make clear that if inflation persists, the Fed will act even if that creates friction with the administration.
Why Bessent’s move has not been enough
Peter Tchir of Academy Securities pointed to the scale of the market. The U.S. government currently has $7.5 trillion in T-bills and $21.7 trillion in coupon-bearing debt outstanding. Bessent’s buyback operations are “at least $4 billion” each and are taking place close to once a week. That is double the previous $2 billion size, but still too small to produce a lasting shift.
Tchir said this is not quantitative easing. In his view, the Treasury is essentially “rearranging chairs on the deck” rather than creating money. The rally in gold and the drop in the dollar reflect an overreading of a “currency debasement” story, not an actual expansion in money supply by the Treasury.
He also highlighted a less visible figure: the Federal Reserve now holds more than 50% of all Treasuries maturing in 10 to 15 years. At the same time, the Fed’s share of long-dated bonds is close to 20%.
Another number has added to the debate. The Fed still holds nearly $426 billion in coupon-bearing bonds that mature within one year, with an average coupon of just 2.9%, while the effective federal funds rate stands at 3.63%. On that position, the central bank continues to run a negative carry.
Operation Twist returns to the discussion
That backdrop has revived talk around a tool that had largely fallen out of view: a Fed-led Operation Twist.
The mechanics are straightforward. If the Fed were to sell those $426 billion in short-dated bonds and buy the same notional amount of bonds with maturities beyond 20 years, it would take an upfront mark-to-market loss but could earn a sizeable carry spread, with roughly 5.25% holding income against a 3.63% funding cost. More importantly, that would absorb more than 15% of the outstanding supply of bonds beyond 20 years and put direct downward pressure on long-end yields.
From Warsh’s perspective, that would not qualify as QE because it would not change the total nominal size of the Fed’s bond holdings. Politically, it may be easier to defend. Tchir’s view is that if the White House truly wants lower long-term yields, it will have to move beyond the limited room available to Bessent and push for full Fed involvement through an Operation Twist.
Ball at Bloomberg offered a similar reading. He said Bessent’s approach increasingly resembles a “light” version of Operation Twist: the Treasury exits long-duration debt through buybacks and shifts toward bills and short coupons, while the Fed uses reserve management to buy bills and absorb front-end supply without expanding its balance sheet.
That mix comes with a built-in conflict. The larger the share of short-term funding, the more exposed the Treasury becomes to policy rates. If inflation forces the Fed to raise rates, interest costs reset faster. If the Fed hesitates because of fiscal concerns, the market may respond by demanding a higher term premium as a penalty on perceived threats to central-bank independence.
By that logic, either the Fed steps in to support Bessent or the intervention risks ending in failure. And a failed intervention can do more damage than no intervention at all.
PCE data arrives before Jackson Hole
Before Warsh speaks, markets will first get another key signal on Wednesday with the release of July personal consumption expenditures, or PCE, data.
Bloomberg reported that inflation, employment and retail sales figures over the past month all came in in line with expectations or below them, leading traders to trim near-term rate hike expectations. If the PCE report extends that pattern, it could give Warsh some breathing room heading into Friday.
Time, though, is getting tighter. Bloomberg’s analysis said political pressure tied to the midterm elections, along with a late-September update to the PCE statistical methodology by the U.S. Bureau of Economic Analysis, could make any tightening move after the September FOMC meeting more complicated in political terms.
The 5% line and the durability of the debasement trade
Wallstreetcn cited Bank of America strategist Michael Hartnett as treating 5% on the 30-year Treasury yield as an important dividing line. If that yield cannot break below 5%, pressure on the dollar and on highly leveraged sectors could intensify, including hyperscale AI computing firms and private credit.
Bridgewater founder Ray Dalio warned on Friday that investors should cut bond exposure and hold gold and some bitcoin as protection against a potential U.S. debt crisis.
Bloomberg said the strain is not appearing out of nowhere. As the Iran conflict continues to escalate, markets are paying closer attention to the U.S. fiscal outlook. At the same time, a surge in AI-related corporate bond issuance is competing with Treasuries for the same pool of capital, while foreign demand for U.S. government debt is becoming more price-sensitive and less tolerant of the current policy path.