Treasury Secretary Bessent Unveils 'Three Moves' to Curb Long-Term Bond Yields! U.S. Treasury Yields Surge Past 5%, Market Worries About Inflation and Deficits

As the 30-year U.S. Treasury yield surged to 5.27%, the highest in 19 years, Treasury Secretary Scott Bessent has unveiled three measures in the past week. First, he collaborated with Japan to intervene in the yen market, then hinted at reducing long-term bond issuance, and finally supported Fed Chair Powell. However, structural issues like high inflation, massive fiscal deficits, and geopolitical risks make it difficult to curb the rising yields.

Priya Misra, a portfolio manager at J.P. Morgan Asset Management, noted that both the Fed and the Treasury are concerned about the long-term yield trends. Bessent's recent moves are signaling to the market that the Treasury is monitoring yield movements and is willing to use all policy tools to respond.

On August 3, the U.S. and Japanese finance authorities confirmed their first joint intervention in the yen market in 28 years. A leaked note from Bessent's cabinet meeting revealed plans to buy $50-100 billion in yen. However, analysts suggest that the intervention's purpose goes beyond simply supporting an ally. Japan, the largest foreign holder of U.S. Treasuries ($1.1 trillion), could be forced to sell U.S. bonds to fund the intervention, further pushing up already high long-term yields.

On August 6, the Treasury changed its language about future bond issuance from "may increase" to "may change," leading the market to speculate about a potential reduction in 20- and 30-year bond issuance.

Bessent defended Fed Chair Powell, describing his communication style as a "detox" process to wean financial markets and financial media off the Fed's forward guidance. However, this approach is seen as contradictory, as it aims to lower long-term yields through interventions and reduced bond supply, while Powell's low-key communication may be contributing to higher yields by increasing policy uncertainty.

In the short term, the 10-year yield fell to 4.61% due to the intervention and falling oil prices, but most analysts see limited policy effects. The 30-year yield remains above 5%, and the 10-year yield hovers around 4.62%.

Structural issues like persistent inflation, massive fiscal deficits, and geopolitical risks make it difficult to curb the rising yields.