The Trump administration is grappling with an escalating challenge as core inflation accelerates in the United States, pushing long-term interest rates higher. While newly appointed Federal Reserve Chairman Kevin Warsh has avoided official rate hikes, his cautious communications have inadvertently driven up long-term government bond yields. The US 10-year yield has jumped from 3.9 per cent to 4.7 per cent, with the 30-year yield climbing to 5.25 per cent from 4.61 per cent since February. This surge directly impacts US home loans, with typical mortgage rates now reaching 6.7 per cent. Faced with looming midterm elections, Treasury Secretary Scott Bessent, a renowned former macro hedge fund manager, has stepped in.
Bessent has initiated strategic market interventions, following a mixed-success coordinated yen-buying operation in July. His primary focus shifted to US government bonds, announcing on August 19 that the Treasury would double its bond buyback operations to at least US$4 billion. These buybacks specifically target the 10-to-20-year and 20-to-30-year segments of the yield curve, aiming to suppress yields and, consequently, long-term mortgage rates. This “Operation Twist” style strategy involves issuing short-term debt to acquire 30-year paper, with Bessent arguing current yields do not reflect fundamentals.
Despite Bessent’s aggressive tactics, market reactions have been somewhat muted. Initial gains in the yen partially reversed, and bond market moves were largely priced out, with the 30-year Treasury yield rebounding to 5.25 per cent after a brief dip. Critics suggest Bessent’s actions risk politicising monetary policy by working against the central bank’s de facto tightening. This could force markets to demand even higher term premiums, potentially leading to increased costs and mirroring past challenges where central bank credibility was tested. The broader context remains a global “higher-for-longer” market regime, driven by persistent core inflation from various dynamics, including technology-related price surges and tight labour markets.
