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The U.S. bond market has dominated the conversation in the debt markets over the past few weeks.
Government debt is facing persistent pressure driven by inflation fears—fueled by rising oil prices—as well as concerns regarding the massive capital being poured into AI infrastructure and anxiety over the rapidly expanding U.S. national debt.
The bond sell-off has triggered a sharp rise in U.S. Treasury yields: 30-year bonds hit a nearly two-decade high, while the benchmark 10-year and shorter-term 2-year notes reached multi-year peaks. Despite the U.S. Treasury’s attempts to halt the sell-off amidst surging borrowing costs, these efforts have been largely unsuccessful.
According to Yardeni Research, the continued rise in yields—despite Treasury intervention—suggests that "bond market vigilantes" are challenging (Treasury Secretary Scott) Bessent, expecting him to deploy a "bazooka" from his arsenal.
"This would entail significantly larger-scale bond buyback operations funded by additional Treasury bill issuance. Such a move has been dubbed the 'Bessent Twist,'" Yardeni noted on Friday. In August, the Treasury Department announced an increase in the volume of long-term bond buybacks—raising the target to at least $4 billion from $2 billion. Then, this week, the agency confirmed its intention to repurchase $6 billion in securities with maturities of 10 to 20 years, disappointing a market that had expected at least $10 billion. The final results of the operation showed that the Treasury received $10.489 billion in offers and accepted $5.187 billion.
"Over the past few weeks, Bessent has employed a number of tools to counter rising Treasury yields, including supporting the yen in coordination with Japan, expanding the long-term bond buyback program, and potentially using funds from the Treasury General Account to finance additional bond purchases," Yardeni noted.
"The Treasury announced a $6 billion buyback operation in the 10-to-20-year maturity sector. However, $6 billion is little more than a rounding error in the $31.8 trillion Treasury market, which includes $5.5 trillion in long-term bonds," the analysts added.
The bond market sell-off this week was exacerbated by US consumer and producer inflation data, which reinforced expectations that the Federal Reserve would raise interest rates by a quarter of a percentage point on Wednesday. The yield on 10-year US Treasuries surged 19.1 basis points over the week, ending at 4.975%—just shy of the key 5% mark.
"It is increasingly likely that the Fed will raise rates by 25 basis points next week. Such a move would bolster confidence in the Fed's commitment to fighting inflation." "In our view, this could somewhat alleviate upward pressure on long-term yields. We believe the Fed should have taken this step back in July," Yardeni stated.
"For now, we expect that actions by regulators and active buying at current levels will keep 10-year yields within our forecast range of 4.00%–5.00%," the analysts added.