Scott Bessent announced on Wednesday that the US Treasury Department will more than double the amount of government bonds it intends to repurchase. The intervention came after a summer of rising yields that sent shockwaves through stock markets worldwide.
Bond yields surge to pre-crisis levels
In the United States the benchmark 10-year Treasury yield climbed above 4.70% before easing to around 4.65% after the Treasury's statement. That is up from roughly 3.97% before the Iran war began in late February. Even more striking, the 30-year Treasury yield breached the 5% mark, a level last seen in 2007, just before the global financial crisis.
Across the Atlantic, Japan's 10-year government bond yield reached its highest point in nearly three decades, while Germany's 10-year yield returned to its 2011 level.
Why higher yields matter
When governments must pay more interest to borrow, households and businesses feel the impact. US mortgage rates, which track the 10-year Treasury, have risen to their highest in a year, raising the average cost of a 30-year fixed loan. Companies also face higher borrowing costs, a concern at a time when massive investments in AI data centres are driving growth.
Higher yields also make Treasury bonds more attractive relative to equities, prompting investors to shift money away from stocks that are currently trading at record valuations. The ripple effect reaches other assets such as gold and cryptocurrencies, which can lose appeal when safe-haven yields rise.
Government debt and political stakes
Rising yields increase the interest burden on governments already grappling with ballooning deficits. The United States, like many other nations, is spending far more than it collects in revenue, and higher debt service costs could limit fiscal flexibility in a future recession.
Historically, bond-market stress has influenced political decisions, it contributed to the downfall of former UK Prime Minister Liz Truss in 2022 and, according to former President Donald Trump, prompted him to delay some tariff proposals because investors were "getting a little queasy."
The Treasury's buyback plan
The Treasury's decision to double its repurchase programme is intended to push down long-term yields by increasing demand for its securities. However, analysts caution that the move may have limited effect if underlying fundamentals, such as large government deficits and the need for tech giants to finance AI-related debt, remain unchanged.
"The operation changes almost nothing in terms of the fundamentals, in particular the unchanged need to finance the tidal wave of hyperscaler debt in addition to very large government deficits," wrote Krishna Guha, an analyst at Evercore ISI.
"The move could even backfire if the limited firepower results in little sustained impact," Guha added.
What comes next?
The Federal Reserve can influence short-term rates, but long-term yields are set by market participants. Recent Fed meetings showed a tilt towards raising the benchmark rate rather than cutting it. Inflation data suggest a modest slowdown, leading many on Wall Street to expect the Fed to hold rates steady at its September meeting.
The next potentially market-moving event could be the speech by Kevin Warsh at the Federal Reserve's annual Jackson Hole symposium on 28 August, where his comments may signal the central bank's future stance on inflation and monetary policy.
Whether the Treasury's aggressive bond buyback will succeed in keeping yields in check, or whether higher borrowing costs will continue to weigh on the economy, remains to be seen.