Bessent’s Bond Market Move Lifts Debasement Trade, Supports Gold

Mike Maharrey

That did not go as planned.

Treasury Secretary Scott Bessent wanted to push down interest rates at the long end of the yield curve, so he intervened in the market.

The move worked, but only briefly.

The 30-year Treasury yield closed at 5.31 percent on Tuesday, Aug. 18. During the session, it reached 5.34 percent, the highest level since 2007. By the close on Wednesday, after the announcement, it had fallen to 5.19 percent. Two days later, it was back at 5.27 percent.

Instead of stabilizing the bond market and driving long-term Treasury rates lower, the action appears to have intensified the debasement trade.

According to the announcement, the Treasury Department will increase buybacks of Treasury securities in the 10- to 20-year and 20- to 30-year maturity sectors from a maximum of $2 billion to $4 billion per operation.

A Business Times report described the limited effect of the move:

“U.S Treasury Secretary Scott Bessent’s bid to tame U.S. borrowing costs knocked down long-term yields for barely a day. The more lasting market signal: the dollar weakened while gold and Bitcoin rallied, reinforcing a debasement trade fueled by swelling U.S. deficits and concerns over the direction of U.S. economic policy.”

“U.S Treasury Secretary Scott Bessent’s bid to tame U.S. borrowing costs knocked down long-term yields for barely a day. The more lasting market signal: the dollar weakened while gold and Bitcoin rallied, reinforcing a debasement trade fueled by swelling U.S. deficits and concerns over the direction of U.S. economic policy.”

The Treasury has not yet begun the bond buyback program. According to the announcement, the expanded buyback operations will start on Sept. 9 and continue through Nov. 4.

Even so, the announcement did not produce the outcome Bessent wanted. Instead, it appears to have worsened the situation and reignited the debasement trade, an investment strategy focused on holding tangible assets such as gold, silver, and other commodities to protect against the decline of fiat currencies caused by monetary debasement.

Treasuries have been under pressure as many countries grow increasingly cautious about holding U.S. debt. With the national debt surpassing $40 trillion last week, and with U.S. policymakers offering no indication that they intend to address borrowing and spending, the fiscal outlook is not reassuring.

Beyond the fiscal issues, the U.S. has also weaponized the dollar as a foreign policy tool. That has made some countries even more wary of holding greenbacks.

The AI boom is adding to Uncle Sam’s funding challenge, as financing for AI expansion has absorbed part of the broader bond market.

Bessent described the buyback as a “liquidity intervention” meant to preserve “market plumbing.” But there is no “plumbing” problem, and the Treasury Department’s intervention does not address the underlying issue. The quick rebound in yields after the announcement made that clear.

Nomura macro strategist Charlie McElligott said the move showed the Treasury Department is nearing its pain threshold for higher yields. He described the “gold-up, dollar-down move” as a “pressure-release valve” as the U.S. intervened to stabilize long-term rates.

Billionaire investor Ray Dalio was more forceful, urging investors to reduce bond exposure and hold gold, along with some Bitcoin, as protection against a possible U.S. “debt crisis.”

The market’s muted response to the Treasury announcement points to an uncomfortable reality: Bessent cannot control the market. Government intervention can move prices temporarily, but it cannot override the underlying dynamics, as Manulife Investment Management senior portfolio manager Nathan Thooft told Business Times.

“The Treasury can influence liquidity and sentiment, but it can’t sustainably override growth, inflation, deficits and supply.”

“The Treasury can influence liquidity and sentiment, but it can’t sustainably override growth, inflation, deficits and supply.”

Another problem is that the Treasury Department has limited room to intervene. It cannot print money, so it must borrow to fund buybacks. In practice, that means issuing more short-term bonds to raise cash so it can intervene at the long end of the curve. It is, as the saying goes, a little like rearranging the chairs on the deck of the Titanic.

That brings in the Federal Reserve.

Warsh & Company will face increasing pressure to intervene on behalf of the Treasury. Through quantitative easing, or QE, the Fed can buy bonds with money created out of thin air. That reduces the total amount of bonds on the market instead of merely shifting supply toward shorter-term notes.

In fact, the Fed is already carrying out small-scale QE operations, although Fed officials will never call them that, as shown by the expanding balance sheet.

But newly created money enters the financial system, and that is inflation by definition.

Historically, the Fed has kept interest rates higher to fight inflation. In other words, the policy needed to reduce the federal government’s borrowing costs creates the effect that later requires those costs to rise.

That is why the Fed is caught in a Catch-22, as this point has been made repeatedly.

The bottom line is that the U.S. government is losing control of the bond market and yields. Investors are no longer reacting simply because yields are rising; they are reacting to the reasons yields are rising. That means a transparent U.S. intervention is unlikely to calm the market.

That is a major problem for a country already spending more than $1 trillion a year to service its debt.

About the author

Mike Maharrey

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