Weekly Comment: Great Scott! Look who’s taking on the bond markets…

Market overview

It’s not often that bond markets overshadow their equity equivalents. After all, how can a bip (basis point) or two change in Treasury yields compete with a 10%, 20%, 30% pop in the share price of the latest AI (artificial intelligence) hot stock? The week ended Friday 21 August however bucked the trend. For despite global stock markets having a risk-off week, it was all eyes on government bond markets, specifically US Treasuries.

To be clear, yields on long-dated US government bonds have been on the rise for some time. The Middle East conflict and associated spike in energy prices; US President Trump’s efforts to rebuild the tariff wall (witness the potential US—Canada trade war); and Federal Reserve (Fed) chair Kevin Warsh’s minimalist approach to communications—have fuelled inflation concerns that have weighed on bond markets. All at a time when demand for long-dated bonds is being siphoned off by the capital-hungry AI hyperscalers and their magnificent debt issuance programmes. 

Against this backdrop, the yield on the 30-year Treasury has reached levels not seen since 2007. Not the best time then for the US Treasury department to release the latest US national debt figure—US$40tn. As well as an inflation problem, bond markets are having to deal with a fiscal one too.

Poacher turned gamekeeper

Enter US Treasury Secretary Scott Bessent, the former hedge fund manager who, while working for George Soros in 1992, took on the Bank of England to bet against sterling and won. Last week Bessent unexpectedly announced plans to “at least” double his department’s government bond buyback programme. The official line is that the change is to “provide greater liquidity support” to the longer end of the US debt market.

That may well be the case but there is a trend emerging.  It was only a few weeks ago that the US Treasury sold euros to buy yen, officially to help the Japanese authorities prop up their currency. Now, this US administration has been labelled many things but altruistic does not feature highly among them. Another explanation for the foreign exchange (forex) collaboration is that the US is keen to prevent Japanese selling of US Treasuries to fund yen purchases. This would appear to be backed up by the subsequent statement from the Japanese that in future the Fed’s Foreign and International Monetary Authorities Repo Facility (Fima) would be used to provide liquidity instead of…selling US Treasuries outright.

All points to a US administration that is worried about long-dated Treasury yields.

Treasury versus bond markets

The problem is the US$4bn buyback programme represents just a fraction of the US$32tn US Treasury market. Furthermore, the mechanics of the buybacks whereby the Treasury borrows at the short end to purchase at the long end does not solve the underlying issues: stubbornly high inflation and that huge national debt pile. Bessent, at least in his hedge fund management days, would no doubt have been all too aware of the size mismatch and also how sticking plaster solutions, such as doubling buybacks to US$4bn, tend to send the wrong message. In this case of a reactive administration that is not wholly in control of events. A signal like that, one presumes, is music to the ears of hedge fund managers and bond vigilantes alike. Bessent should know.

As for how US Treasuries reacted to the buyback news, the yield on the 30-year note dropped nine basis points following the announcement. Pat on the back for Bessent then? Not at all. Most of the gains were soon given back.

A little context

It should be pointed out that although 30-year Treasury yields hit a 19-year high last week, they did end the week off their highs. It is also important to note that for now the rise in yields has been orderly, with the 30-year Treasury yield edging up from 4.85% at the start of the year to a peak of 5.34% last week. This yield reached 5.18% in 2023 and also traded above 5% a number of times in 2025 so while we are at a near two-decade high, levels are not much higher than what we’ve seen in recent years. The year-to-date (YTD) return on US Treasuries stood at -0.5% in dollar terms as at 21 August 2026.

The concern is that current 5%+ levels this time may not signal a high-water mark and if questions grow around US debt sustainability and/or Federal Reserve/Treasury credibility then things could escalate significantly. For now, bond investors are still giving Bessent and Warsh the benefit of the doubt and we are watching closely to see whether this remains the case going forward. In the meantime, Bessent versus the bond markets is a story that could run on and on.

Weekly market moves:

The MSCI All Country World Index (MSCI ACWI) ended the week 0.9% lower, up 14.7% YTD.

United States:

Against the backdrop of higher Treasury yields, the Middle East conflict and the AI trade in risk-off mode, the main US stock index ended the week 1.4% lower (+12.9% YTD). Large-cap growth stocks (-2.3%) underperformed value (-0.5%), while small caps (-1.6%) were somewhere between the two. That means the already yawning YTD gap between growth (+3.8% YTD) on the one hand and value (+23.3% YTD) and small caps (+22.6% YTD) on the other has become well more yawning.

As highlighted earlier, US Treasuries found the going hard. The yield on the 10-year note ticked five basis points higher to 4.74% (up 57 basis points YTD). The 2-year Treasury yield was up seven basis points to 4.24% (up 76 basis points YTD), perhaps in anticipation of potentially more upcoming issuance to fund the long-dated buyback programme!

United Kingdom:

The recent pattern of the main UK stock market moving in the opposite direction to the global equity benchmark continued. London large caps’ large weighting to energy and banks, two beneficiaries of the high oil price and high-interest rate environment, finished the week 0.7% higher (+11.6% YTD). Mid-caps too outperformed despite ending the week 0.6% lower (+12.5% YTD). Meanwhile, US fiscal concerns weighed on the US dollar, enabling sterling to strengthen to US$1.36 from US$1.35.

It wasn’t just US government bonds that were on the back foot. Gilt yields too edged higher, albeit fractionally. The yield on the 10-year gilt ticked two basis points higher to 5.06% (up 58 basis points YTD). Not a bad result given UK inflation rose to 2.9% in July from 2.6% in June, due largely to an increase in the energy price cap.

Europe ex UK:

A weekly fall of 0.8% enabled the MSCI Europe ex-UK Index (+12.7% YTD) to outperform the global index. As with the US, inflation concerns, weak government bond markets and the Middle East conflict dominated sentiment. At the national level, the main German index finished 1.1% lower (+6.7% YTD), France’s was down 1.8% (+6.8% YTD), while Italy’s fell 1.7% (+20.8% YTD). Like the UK, Switzerland was an outlier, rising 0.5% (+12.2% YTD). And like sterling, the euro appreciated to US$1.17 from US$1.16. Similarly, the 10-year German Bund yield followed the global trend, rising six basis points to 3.26% (up 40 basis points YTD).

Important information

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