Brian Jacobsen was heading into a meeting Wednesday when Treasury Secretary Scott Bessent threw a major curveball at the U.S. bond market.
A day earlier, yields on 30-year U.S. Treasurys had touched near two-decade highs and investors were on edge. Jacobsen, chief economic strategist at Annex Wealth Management in Brookfield, Wis., had trimmed holdings of longer-term bonds in portfolios he manages for clients.
Now, in the wake of the Treasury Department announcing that it would at least double buybacks for long-term bonds, the market was moving against him by rallying. The maneuver, Jacobsen said, clearly wasn't just a technical adjustment, but "an attempt to try to tame the moves" in yields.
But he also wasn't worried, viewing it as a superficial fix that wouldn't last.
He was right.
Over the next two days, Bessent's victory proved fleeting as investors gradually imposed their will on the bond market, snapping yields back to where they were before the gambit.
The yield on the 10-year U.S. Treasury note settled Friday at 4.737%, according to Tradeweb, up from 4.695% a week earlier. As investors processed the intervention, they dumped the dollar in favor of gold and cryptocurrencies in a so-called debasement trade. The WSJ Dollar index slipped 0.7% over the week, while bitcoin surged 22%.
Treasury's buyback announcement was meant to arrest a monthslong slide in bonds that has pushed borrowing costs higher across the economy. But it hardly resolved the deeper concerns that have spurred that selloff, analysts said.
Investors remain anxious about stubbornly high inflation, mounting federal debt, a deluge of corporate borrowing to fund artificial-intelligence investments, and a new Federal Reserve chairman whose approach to setting interest rates remains enigmatic to many. For some, the Treasury Department's response only added to the sense of a typically staid market gone disturbingly off kilter.
Gennadiy Goldberg, head of U.S. rates strategy at TD Securities, said the current moment in the bond market reminds him of when the country received its first credit ratings downgrade in 2011 after a prolonged debt limit standoff.
"The issue is that you've got an erosion of confidence in institutions-including the central bank, including Congress, including the Treasury itself to some extent," he said.
A bond market slump takes hold
The roughly $31.5 trillion U.S. Treasury market is regarded as the world's biggest and most important bond market. Treasury yields, which rise when bond prices fall, set a floor on borrowing costs, from mortgage rates to student loans. Yields typically edge up or down based on the shifting outlook for short-term rates set by the Fed, which investors glean from economic data and comments from Fed officials.
It's often a boring market, with yields rarely moving even a tenth of a percentage point in a day, but has become a more regular source of excitement in President Trump's second term.
Shortly after taking his job, Bessent made the bold claim that the administration could influence the market and drive down yields to lower borrowing costs for Americans. He said the administration would do that by slashing the budget deficit-and thus reducing the supply of Treasurys-and increasing oil and gas production to lower energy prices.
Those plans haven't panned out. Just months into his second term, Trump's tariffs set off a crisis in the bond market when investors dumped bonds out of fear that other countries could retaliate by selling their Treasury holdings. The market calmed when Trump scaled back the tariffs. But yields began climbing again this year after the U.S. and Israel attacked Iran, prompting Iran to shut down the flow of oil through the Strait of Hormuz.
As energy prices jumped, investors quickly went from betting that the Fed would cut interest rates this year to betting that it would need to lift rates to tame inflation.
Then, things got weirder: Oil prices retreated to pre-conflict levels in June, but Treasury yields fell only a little. For the past two months, yields on longer-term Treasurys in particular have steadily climbed, defying even a run of soft economic data that reduced the chances of a near-term interest-rate hike.
By early this week, the yield on the 30-year Treasury bond had topped 5.3%-its highest level since 2007. Average mortgage rates have crept back up toward 7%.
There's little agreement about what has been the biggest driver of that move. Some analysts and investors cite the explosion of bond issuance-from AI hyperscalers such as Amazon.com and Alphabet-which they say has crowded out investment in Treasurys. Others point the finger at the budget deficit, which remains stuck at around 6% of GDP, despite Bessent's claim that it could fall below 4% by the end of Trump's term.
Most put at least some of the blame on new Fed Chairman Kevin Warsh.
Trump's pick to lead the Fed has refused to give much insight into what could push him to support interest rate increases-a stance that has created uncertainty about the rate outlook, along with concerns that he might want to avoid raising rates because of pressure from Trump.
'The impression of a backstop'
Bessent's Wednesday intervention seemed to work instantly. But it didn't take long for skeptics to weigh in. And later that day came an unwelcome milestone: Gross U.S. debt had topped $40 trillion for the first time. Overnight and into Thursday morning, the impact of Bessent's move began to fade as long-term yields ticked up once again.
Bessent went on CNBC that morning to make his case. He suggested that the Treasury Department had intervened because investors have "bad information" that had pushed yields higher than was justified by economic fundamentals.
As it stands, the Treasury Department will increase the maximum amount of older "off-the-run" longer-term Treasurys that it purchases in buyback operations from $2 billion currently to at least $4 billion. Analysts said that the Treasury Department will likely issue more short-term bills to fund the scaled-up buyback program, which was originally meant to improve liquidity in less frequently traded bonds.
Some investors welcomed the move, saying there is more demand for short-term than longer-term debt at the moment. Others worried it could backfire in part by raising expectations that the Treasury Department will intervene anytime yields rise past certain key level-expectations that could be hard for Bessent to meet.
"You create the impression of a backstop, but you're not really committed enough," said Brent Donnelly, president of Spectra Markets.
Analysts noted that one reason yields dropped sharply on Wednesday after the buybacks announcement was that it caught traders by surprise, forcing some to quickly unwind bets on higher long-term yields. Once that was over, previous market dynamics reasserted themselves, with Bessent's move possibly even drawing more attention to issues such as the budget deficit.
As a former hedge fund manger, Bessent "knows how to move markets," said Jacobsen. "The problem is that when you're thinking from that trader perspective, it's about the short-term moves, and these are long-term issues that need to be dealt with."
Many investors said that the bond market is likely to remain uneasy at least until Warsh speaks next Friday at the Kansas City Fed's annual Jackson Hole symposium.
Warsh, who has set up task forces to examine how the Fed handles issues like communication and economic data, just needs to say in concrete terms that "so far, the inflation data doesn't give them reason to hike, but if that changes, they would not hesitate to hike," said Priya Misra, a fixed-income portfolio manager at JPMorgan Asset Management.
If he keeps "saying 'task force' again, the market's going to lose patience," she said.
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