Washington is fighting the bond market and the bond market keeps winning

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THE US TREASURY AND THE FED ARE NOW AT WAR WITH EACH OTHER

Scott Bessent wants yields down. Kevin Warsh is pushing them up. Neither side is winning.

On August 19, Bessent doubled Treasury bond buybacks to $4 billion a week, aimed at the 10-year to 30-year part of the curve, specifically to force long term borrowing costs lower.

The move worked for a few hours. The 30-year yield dropped about 10 basis points right after the announcement.

By the next day, the entire move had reversed. The 10-year sat at 4.704% and the 30-year at 5.248%, both higher than before Bessent’s announcement.

This isn’t happening in a vacuum. US national debt just crossed $40 trillion, after adding $1 trillion in new debt in just a few months. The federal deficit is on pace for close to $1.9 trillion this fiscal year.

On top of that, tech companies are flooding the bond market with corporate debt to fund AI and data center buildouts, competing directly with Treasury issuance for the same pool of buyers.

That combination, more government debt, more corporate debt, and a Fed unwilling to ease, is the real reason yields keep grinding higher no matter what Bessent does.

Bessent responded by threatening even bigger buybacks, saying yields don’t reflect fundamentals. Yields ignored him and kept climbing anyway.

Then on August 28, Warsh gave a hawkish Jackson Hole speech, locking in the 2% inflation target as “firm and fixed” and refusing to rule out a September hike. That pushed yields higher again, wiping out whatever ground Bessent had gained.

This same fight is already playing out in Japan, and it is not going well there.

The Bank of Japan has been hiking rates to defend the yen, and Japan’s 2-year yield just hit 1.698%, a 31-year high. At the same time, Japan’s government has spent a record 15.4 trillion yen, about $96.6 billion, in the last month alone trying to prop up the yen through direct intervention.

Despite that record spending, the yen is still trading above 160 against the dollar, the same level that triggered a coordinated US-Japan intervention earlier this year.

In Japan’s case, the central bank hiking rates to fight inflation is directly undermining the government’s effort to defend its currency through intervention. The two arms of the same government are working against each other, and the yen keeps losing anyway.

The US is now showing the same pattern.

The Treasury is spending its own tools trying to hold yields down while the Fed’s own chair is actively pushing them higher with hawkish rhetoric.

If the Fed keeps leaning hawkish while the Treasury keeps fighting yields with buybacks, the US bond market could start seeing the same kind of persistent stress that has been building in Japan all year, where no amount of intervention fully works against a central bank moving the opposite way.

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