The Big Bond Bust Is Here

David Haggith

The warning I wrote on Wednesday afternoon about Scott Bessent’s major intervention in the Treasury market had already proved accurate by Thursday morning—faster than I expected. I would have given it two days to fall apart. So I will begin this Deeper Dive with some headlines for everyone in the portion available to all readers, starting with these Thursday morning lead headlines on Drudge:

Treasury yields rebound, wiping out the decline following Bessent’s intervention

And this one:

The Treasury Market’s Coveted Status as a Safe Haven Is Fading (Two new studies find signs investors aren’t as willing to accept low yields because of Treasurys’ safety)

Dollar Risks Becoming Biggest Loser From Bessent’s Bond Buying

In the whirlwind of news this week about a global bond market collapse, it was difficult to decide how to cover it all appropriately. In the end, I decided to focus primarily on what matters most: What are the risks for all of us? Rather than digging too deeply into the mechanics of what was done or what is blowing up, the more important question is what is really at stake and how it will affect us.

These headlines, which address some of the questions I had planned to cover, appeared the same morning I set out to write about the subject. So here is an introduction based on Thursday’s headlines for everyone in a Deeper Dive I am publishing early because I am taking the weekend off for family reasons, barring any news so major that it draws me back in before Tuesday, when I hope to be back at work. That is when visiting family leaves after arriving late Thursday. After that, I will dig deeper for paying subscribers.

Sent Back

The top Drudge headline about Scott Bessent’s plan being sent backward caught my attention most because you may remember what I wrote just the day before:

It is not as surprising as it is sad that the feds came to the rescue today, nor surprising that stocks rose in response to horrendously bad news about a global bond default because it means there is a big new money dump in town. Stocks rose and Treasury yields fell as they were rigged by the Treasury to do, sliding on the long end of the curve. It went according to plan.

Yet it is precisely because we always solve these things with rescues and never with true fiscal reform that we have built up the biggest bond crisis in history that now needs another rescue. It is because other nations like Japan did the same thing that those nations impact ours because they are so wedded to the global dollar. It is the global dollar that is at stake again, hence the Treasury’s rush to the rescue.

But here is the problem. The knockout drugs, intended to put the bond vigilantes into a deep sleep, are massively powerful but do not last long. They always require another hit, a bigger hit, and then another to keep the new high going. So the rescue plans, as we saw especially during the Great Recession when I cut my economics writing teeth, get bigger and bigger and more drawn out and filled with fancier new tricks. That path has been my most consistently accurate prediction since then.

We just saw all of that play out more quickly than I imagined—in about twelve hours. While I have yet to be wrong in saying that any of these rescue plans will demand bigger and bigger hits, I have never been right this quickly. But there it is in the morning news. The high from Bessent’s rapid intervention has already faded to a hangover, and the press is already pointing out, as I said in that warning, that the number-one ultimate risk is the dollar. More precisely, the dollar and the solvency of the national debt are at stake together.

Getting Some Sense Whipped into Them

So let us go through those articles in order, because they summarize well what I set out to write Thursday morning, though I have more to say:

Bond yields climbed Thursday morning, erasing most of the pullback they saw the previous day after the Treasury Department announced an intervention aimed at easing pressure on longer-dated government debt.

One of the biggest problems Bessent sought to overcome was the sudden rise in bond yields tied to the broader global bond crisis. The key point in this part of my Deeper Dive for all readers is that Bessent failed with his one bold move to force yields back down, and that is massively important. Why? Because the national debt yesterday also surged past the cliff-edge milestone of $40,000,000,000,000. That is a lot of zeros and a long way to fall. It means a lot of interest, much of it funded through long-term Treasuries, where Bessent’s move was aimed at lowering rates by rolling debt into short-term Treasuries that carry lower rates.

Of course, those short-term Treasuries will rise in cost as soon as the Treasury starts issuing many more of them to fund the buybacks of the longer Treasuries. Enough on the mechanics, since I promised not to focus on that. The important point is that the plan immediately failed. Long-term rates shot right back up to the same scary level they had reached before the plan.

Nothing magical happened when the debt crossed $40 trillion, except the psychological impact, but that can matter for interest rates too. Regardless of the psychological effect of the big number, it is still a huge amount of interest, and Bessent cannot allow rates to keep soaring the way they are during a global bond bust that is larger than U.S. troubles alone.

The 10-year and 30-year yields were back near the levels they held before the 8:30 a.m. announcement on Wednesday that the Treasury would step up its bond buyback program.

The yield on the 2-year Treasury note, which more closely tracks short-term Federal Reserve policy, was last seen up 1.5 basis points to 4.1927%.

So long-term bonds are back where they were before the intervention, but short-term bonds also edged higher, meaning everything is immediately as bad as, or worse than, before the intervention. It is already time for a much larger hit if the path being taken is to do everything the Fed and the federal government can think of to prevent a collapse of the dollar and a debt catastrophe.

The moves underscored how difficult market interventions are, especially at a time when U.S. debt faces a range of factors that have been pushing yields higher.

Even the mighty United States, struggling to finance its imperial wars, cannot afford higher interest on a $40 trillion debt.

In a move announced Wednesday morning, the Treasury Department, led by Secretary Scott Bessent, said it would at least double the size of its government debt buybacks, starting Sept. 9 and running through Nov. 4.

That was a small move. Its importance, as I said yesterday, was that it showed this is a debt crisis that required Treasury intervention. But the crisis is far too large for that small dose of Treasury medicine to do the job, which is borne out by what I wrote yesterday:

It is not normal for Treasury rates to fall on the day after massive bond problems blow up in global markets, especially a blowout as tightly wedded to U.S. Treasuries as Japan. The announcement by Bessent of a major rescue would spark fear into the hearts of bond investors if not for the fact that the Treasury money will be massive enough to outweigh the risk, so long as there is more to come, as there always is.

The move failed to help because, in the end, it triggered as much fear as any safety it may have offered. In fact, I am sure it will trigger wave after wave of fear as investors see the scale of new Fed medicine rise alongside Treasury medicine, signaling how large the problem is. Bessent is already calling in the Fed. That is what we saw back in the repo crisis I mentioned, the Repocalypse. The more they did, the more they had to do, until they finally went all in with trillions of dollars of intervention, which looked like this:

Federal Reserve Bank of St. Louis

The Repoaclypse was a crisis in normally very boring interbank lending that happens at foundational low interest rates, but the crisis immediately sent those boring interbank interest rates through the roof. I do not mean the fractions by which such loans are usually measured, but a leap to 10%, which the Fed tried to push back down with larger and larger incremental steps that failed to hold each time. That is why you see all the little stair steps rising in the red circle.

Then Covid hit, and the Fed carried out massive interventions with new money for Covid, which ended the repo crisis. Repos are what those kinds of loans between banks are called, without getting into the gritty detail. We will never know how much it would have taken to end the repo crisis. We only know that it was never enough until the Fed did massive intervention for other reasons, creating trillions of new dollars on bank balance sheets, the sudden massive rise in the graph, and that huge burst of liquidity finally put out the fire.

The Treasury now has stepped into that small red circle of small interventions, mere billions, that accomplish nothing. As with the repo crisis I compared to yesterday, each intervention of tens of billions had to be repeated in larger amounts only a day or two later, rising into the hundreds of billions.

So my warning yesterday continued this way:

We have seen how these game plans go—in 2008 with the almost endless rounds of nearly almighty easing for years and in 2019 during the Repocalypse that ultimately forced the Fed back into quantitative easing after its brief experiment with quantitative tightening that former Fed chair Yellen had promised would be as boring as watching paint dry, but it was not.

What happens every time is that they do more, then they have to do more. So get ready for another rodeo ride as the Fed and the federal government go back to bronco busting the dusty “OK Dollar Corral.” It is going to be a long ride, fraught with new perils. That is another prediction in which I have total laid-back confidence.

And that prediction is already proving true, less than twelve hours after I wrote it.

Yields tumbled after the announcement, with the 30-year down about 10 basis points after previously hitting its highest level in about 19 years, before the 2008 global financial crisis.

However, the move quickly unwound, with yields higher on Thursday as the market digested the announcement and the longer-term structural problems facing the fixed income market.

The interventions “belie the underlying structural challenges and do nothing to address them,” Maia Crook, senior research analyst at JPMorgan Chase, said in a client note. “While [Wednesday’s] action forced some decline in longer-dated yields, the more lasting impact is the potential for higher risk premia reflecting a Treasury Department that is intervening in the market and moving away from its ‘regular and predictable’ tenet.”

Exactly as I wrote yesterday. The premia are that everyone now sees the Treasury intervening, so they want higher compensation for the risk the Treasury just woke them up to by trying to send them all to sleep with short-term drugs. They are essentially saying, “Whoa! What was that quick trip all about?”

Unsurprisingly, the stock market, which I said reacted stupidly on Wednesday, caught up on Thursday too:

Dow tumbles 700 points, S&P 500 falls as Treasury plan to subdue yields fails

Reality is a harsh teacher, so they are getting whipped around because they were dumb yesterday, only to wake up with a heavy hangover from the hard drugs administered by the Treasury.

U.S. stocks fell on Thursday as Treasury yields reversed course from the prior day’s decline following the Treasury Department’s debt buyback announcement.

Also weighing on equities, oil prices rose again amid increasing tensions between Iran and the United States. President Donald Trump said in a Truth Social post late Wednesday that the U.S. would begin the “most crushing economic operation ever taken against any country” against Iran. “This will be Economic Warfare and Isolation on an unprecedented scale,” he wrote.

The lasting and escalating effects of Trump’s war should already be obvious. There are many more wake-up calls ahead because an economic war is guaranteed to create new economic casualties. The other side does fight back, and the economic blows we deliver send shock waves back at us in ways little Trump does not seem to imagine, just as he still does not imagine that his tariffs are adding inflation or that his war will hit people with more than rising gas prices.

Brent crude is now at $93. That is one of the small ways even the announcement of major economic warfare comes back to cost people money directly. But we already knew the war would continue to escalate and push oil prices higher. As I have warned all along, wait until actual fuel shortages arrive here, as I have reported they already have in major ways in Russia. It is an interconnected oil world, and Russia’s vast oil and refined fuel once flowed everywhere, but now they flow nowhere except within Russia.

Safe-Haven Status Blown Up

The next headline among the three I opened with will mostly be covered in the Deeper part of this dive for paying subscribers because it requires much more digging, but note how important all of this is. It raises major doubts about “the Treasury market’s coveted status as a safe haven.”

That status is being blown apart by everything. It is literally being blown apart by a war that no one but the president and Israel seems to want. That is driving up U.S. debt at a time when the Treasury market is becoming more sensitive to the enormous U.S. debt burden, and the president’s constant and obvious lying throughout this war is not building trust in the United States as a safe and predictable haven.

Neither is the president’s constant renegotiation of already renegotiated tariffs, including the new tariff he came up with recently because of smoke drifting into the United States from Canadian forest fires. His tariff tactics are more like the old-fashioned rack used to stretch bones. As I pointed out long ago, tariffs reduce the need for trade dollars, which means they reduce the need for U.S. Treasuries, the main instruments in which those dollars are often exchanged between central banks. A reduced need for the global currency because of restricted trade will affect the dollar’s value. A reduced need for Treasuries will raise the cost of financing them.

So yes, Treasuries are losing their safe-haven status, and that means the dollar is being damaged too. This war is giving nations many reasons to dislike dealing in the petrodollar at the same time Trump has been giving them many reasons through his endlessly volatile tariffs. They change constantly. He can never be trusted to keep a deal even for a year, which is forever in Trump time. So the United States is increasingly becoming an unstable financial partner around the world because of the increasingly unstable person it chose for president.

Investors in U.S. debt are demanding higher and higher risk premia in this unstable world of Trumpian chaos and conflict, in which the United States seems to be creating most of the instability.

Dollar Damage

If we keep proceeding as recklessly as we have been, this will become dollar destruction. The third headline I led off with shifts from damage to Treasuries as the longstanding global safe haven to the dollar’s risk of becoming the biggest loser from the damage in the Treasury market, especially because of the kind of rescue plan Bessent has devised:

Treasury Secretary Scott Bessent’s bold intervention to stem a potentially damaging rise in U.S. borrowing costs has some investors saying the dollar will ultimately pay the price.

Coming after other recent efforts to rein in long-term yields, it is reviving concern that U.S. policy could weaken faith in the dollar and push investors toward alternatives.

I think everything is doing that right now—wars with their enormous debt burden and especially their destruction of the petrodollar through the destruction of reliable oil trade; tariffs that reduce the need for a global trade currency denominated in dollars as nations move toward trading less with the United States and more with each other because U.S. consumers and businesses do not want to pay the tariffs that make those countries’ products too expensive; and a mercurial president who cannot be trusted and who said on Thursday he wants the harshest economic warfare ever seen, apparently oblivious to the fact that the enemy will fight back with its own economic destruction, which it is already doing very effectively. This all spirals further out of control because of the orange nutball in the White House.

“The dollar certainly is the biggest casualty,” said Gerald Gan, chief investment officer at multi-family office firm Reed Capital in Singapore. He sees Bessent as deliberately pushing down long-term real rates and signaling tolerance for a weaker dollar to keep the economy afloat.

“I would further diversify away from the dollar,” he added.

And with that, we move on to the part of the Deeper Dive for paying subscribers, because a man has to make a living to keep devoting this much time to it.

First, here are a few more headlines from Thursday, which is usually another day for major headlines, and these are not ones I want you to miss because of their economic significance:

Walmart Posts Weakest Sales Growth in Over Six Years

When Walmart is losing ground, it means consumers are sharply pulling back because of inflation. If they are pulling back at Walmart, one of the cheapest stores, they must be pulling back everywhere, and that is seriously recessionary. The pass-through of inflation from oil and tariffs is happening.

Personal bankruptcy filings are surging as Americans struggle with debt

People kept up their lifestyles, and therefore their retail spending, despite inflation by relying more on credit. That is now collapsing. Debt is becoming an end-of-the-road problem for consumers, just as it is for the U.S. Treasury.

Nato jet destroys [Russian] drone ‘loaded with explosives’ metres from Black Sea gas project as ‘irresponsible’ Russia slammed

7 questions about the national debt hitting $40 trillion

Now, on to the deeper troubles hidden in the global Big Bond Bust.

About the Author

David Haggith

David Haggith is the publisher and editor-in-chief of The Daily Doom, Economic, Social and Political News of Our Troubled Times — a non-partisan daily collection of the most consequential stories about our complex times from multiple sources around the world, plus daily editorials like the one you just read.

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