The brief relief in the bond market appears to be fading, with long-dated Treasuries resuming their decline on Thursday and continuing to pressure equities, as investors question the effectiveness of the Treasury Department's support measures. Meanwhile, rising oil prices have reignited concerns over inflationary pressures. The Dow fell 0.71%, the S&P 500 dropped 0.34%, and the Nasdaq declined 0.50%. Moderna slid 13.03%, Walmart dropped 7.66%, AutoZone fell 5.33%, and O'Reilly Automotive slipped 4.15%. Among the "Magnificent Seven," Apple gained 0.69%, Nvidia edged up 0.03%, Meta Platforms dipped 0.02%, Microsoft slipped 0.16%, Alphabet lost 0.56%, Amazon fell 1.09%, and Tesla declined 1.93%.
Treasury yields moved higher on Thursday, bouncing back from Wednesday's pullback, following the Treasury Department's announcement that it would at least double the size of its buyback program for 10-year, 20-year, and 30-year notes over the coming months. Earlier this week, the 30-year yield had surged to its highest level in nearly two decades. The 10-year yield rose more than 5 basis points to 4.704%, while the 30-year yield climbed 6 basis points to 5.254%.
Escalating U.S.-Iran tensions and higher oil prices also weighed on the market. On Wednesday evening, President Trump stated that the U.S. would launch "the most devastating economic action ever taken against any country" in response to Iran. He wrote, "This will be an economic war and blockade of unprecedented scale." U.S. WTI crude futures rose 3%, breaking above $88 per barrel, while the international benchmark Brent crude also advanced 3%, surpassing the $94 per barrel threshold.
The sharp pullback in Walmart's stock also dragged on the broader market. The retail giant's shares tumbled more than 6% after its U.S. same-store sales missed analyst expectations, and its third-quarter and full-year adjusted earnings forecasts also came in below consensus estimates.
Wall Street had closed higher in the previous session, with the S&P 500 snapping a three-day losing streak, after the U.S. government unveiled measures to ease pressure from the bond market selloff, pulling long-term yields off multi-year highs. However, Michael Schumacher, former head of macro research at Wells Fargo, believes the brief bond market respite is unlikely to last. "I remain bearish on bonds. There are multiple reasons for rising long-term rates. In particular, the U.S. faces a massive fiscal deficit with little sign of improvement. On top of that, defense spending continues to rise," he said in an interview. "This was already the case before the Iran conflict, and the conflict has further exacerbated these issues."
JPMorgan has warned that the Treasury's doubling of its bond buyback program lacks credibility. JPMorgan strategists cautioned that the market may view the Treasury's unexpected move to curb long-term funding costs as lacking credibility, which could push term premiums and yields higher over time. "Without genuine fiscal consolidation, we worry the market will view this action as lacking credibility," wrote strategists including Jay Barry in a note. "If the Treasury becomes more opportunistic in its debt management approach and deviates further from its 'regular and predictable' principles, this could lead to higher term premiums and yields over time."
Aegon Asset Management is pushing back against the Treasury's efforts, arguing that increasing long-dated bond buybacks "doesn't mean much." Despite Treasury Secretary Bessent's attempts to suppress long-term bond yields, Aegon remains firmly positioned for the spread between short- and long-term borrowing costs to continue widening. In the view of Aegon portfolio manager Lynch, expanding long-dated Treasury buybacks "doesn't mean much" and will not change his outlook for continued steepening of both U.S. and European yield curves. Lynch noted, "The fiscal issues — the massive deficit, the impact of mega-corporate debt flooding the market, inflation still running above target, and unclear Fed communication — are all injecting an additional premium into the market. I don't see these factors disappearing anytime soon."
An AI-driven debt wave is building, with September set to be the real test for Treasuries. As the Treasury Department expands its long-dated buyback program to ease pressure on the bond market, another massive wave of debt financing is unfolding. The core driver of this financing expansion is AI infrastructure spending. The U.S. investment-grade corporate bond market typically sees a surge in issuance after Labor Day. With hyperscale cloud computing companies' financing needs rising, September corporate bond issuance could reach $200 billion, potentially delivering a fresh shock to an already strained Treasury market. According to market estimates, U.S. investment-grade corporate bond issuance has grown 38% year-over-year since 2026, with full-year issuance projected to hit a record $2.1 trillion. A significant portion of the new supply comes from AI-related capital expenditures. This supply wave, combined with U.S. fiscal deficit expansion, rising inflation expectations, and Fed policy uncertainty, is reshaping the supply-demand dynamics of the fixed-income market.
The U.S. economy risks "collapsing at any moment," with three key indicators flashing red and the AI bubble serving as the final straw. Finnish economist Tuomas Malinen, who specializes in financial crises and geopolitical risks, believes that while the U.S. economy has not yet shown a clear recession timeline, downside risks have risen markedly. He points out that U.S. bankruptcy filings have climbed to their highest level since the pandemic, while the private-sector yield curve is signaling that "a U.S. recession is about to begin." Meanwhile, U.S. manufacturing new orders are the only indicator still flashing positive, but that is not enough to offset other risks, as current U.S. economic growth appears heavily concentrated in a few sectors. He is particularly concerned that the AI investment boom is forming a new market bubble. If the AI trade were to suddenly collapse, the economy could weaken as rapidly as it did after the dot-com bubble burst.
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