Bessents game of chicken with the bond vigilantes

Marketing communication 20 August 2026

Bessent's Game of Chicken with the Bond Vigilantes US Special

Contents RaboResearch Introduction 1 Will the Fed have to step in? 3 Global Economics & The fundamentals 2 Conclusion 3 Markets The limits to the Treasury’s intervention 2 knowledge.rabobank.com

Philip Marey Summary Senior US Strategist  The Treasury Department’s extraordinary announcement to unexpectedly boost buybacks of longer-term bonds has only temporarily interrupted the rise in yields.  The real question is: can yields be stopped from rising when the macroeconomic fundamentals − elevated inflation, rising budget deficits, AI-related investment demand − remain entirely unchanged?  While Congress and the White House actually have the power to address some of these fundamental drivers, the Treasury has resorted to market intervention instead.  This introduces a whole new set of complications. By making debt issuance less predictable, it fuels market volatility. Ironically, this could force investors to demand an even higher risk premium on Treasury yields.  The ultimate problem with the Treasury’s intervention is that it costs money. For now, the Treasury is funding this by shifting from longer-term debt to shorter-term debt. But with the total federal debt constrained by the debt ceiling, the Treasury will eventually run out of ammunition.  If the Treasury runs out of firepower and yields spike again, the Fed may feel compelled to step in and buy those bonds. Unlike the Treasury, the Fed faces no limits on the scale of its interventions, giving it far more credibility in a standoff with market forces.  Ironically, this scenario could render Kevin Warsh’s internal debate about balance sheet reduction entirely academic. Instead of exiting the fiscal space, the central bank would be pulled even deeper into it.

Introduction The Treasury Department’s extraordinary announcement to unexpectedly boost buybacks of longer-term bonds has only temporarily interrupted the rise in yields.

Yesterday, the Treasury announced that is at least doubling the size of liquidity support buyback operations for longer dated (10 to 30 year) federal government bonds. The current maximum size of $2bn per operation will be at least $4bn per operation. This change is effective September 9 and will be in effect for the remainder of this refunding quarter through November 4. Although the Treasury stated that the increase in buyback operation sizes “reflects Treasury’s desire to provide greater liquidity support”, the timing suggests an attempt to halt the rapid rise in longer- term Treasury yields.

The initial market reaction was as intended, but today the 10 and 30 year yields have rebounded, with the 10 year actually higher than shortly before the announcement. However, we have not seen the end of it. Today, Bessent said he could step up buybacks even further. It seems a game of chicken between Bessent and the bond vigilantes has started, but how is this going to play out?

1/7 RaboResearch | Bessent's Game of Chicken with the Bond Vigilantes | 20-08-2026, 21:27 Please note the disclaimer at the end of this document.

The fundamentals The real question is: can yields be stopped from rising when the macroeconomic fundamentals remain entirely unchanged?

As long as oil supply disruptions persist, inflation concerns aren't going anywhere. Combine that with skyrocketing US defense spending pushing up the federal budget deficit − at a time when fiscal discipline has gone out the window − and the upward pressure is clear. To make matters more complex, the government is actively competing for funding with massive AI-related private business investments.

While Congress and the White House actually have the power to address some of these fundamental drivers, the Treasury has resorted to market intervention instead.

This introduces a whole new set of complications. By making debt issuance less predictable, it fuels market volatility. Ironically, this could force investors to demand an even higher risk premium on Treasury yields.

Figure 1: The rising term premium

The limits to the Treasury’s intervention The ultimate problem with the Treasury’s intervention is that it…