Earlier this month, Treasury Secretary Scott Bessent dared traders to cross him when he declared, “I am the house now” to demonstrate his power to dictate terms in financial markets. Well, the house is getting a lot of egg on it.
The $32 trillion American bond market is generating a flood of headlines lately. Why? The instrument that the U.S. government uses to fund its own activities is going haywire.
The 10-year Treasury yield is trading at its highest level since the run-up to the financial crisis in 2007, and a similar spike has been recorded for the 30-year yield, which reached its highest point since 2004. These bonds influence mortgages, auto and corporate loans, so it carries real financial consequences for Main Street, as Navy Federal Credit Union Chief Economist Heather Long has pointed out.
Bond vigilantes are testing the U.S. government’s appetite for punishment. In this instance, the Trump administration is proving to be a glutton.
It’s harder now for Americans to lock in personal loans under favorable terms or to refinance a mortgage without paying a lot more. The average 30-year mortgage rate has leapt to just over 7%, which started climbing earlier this year after the United States partnered with Israel to launch a military campaign against Iran that currently has no end in sight. Bond unrest is also bad news for Wall Street, since higher yields can squeeze corporate borrowing and ultimately constrain their profits. Yields move opposite to prices, and their steady climb signals that investors are demanding higher interest rates in exchange for buying government debt.
Higher rates carry financial consequences for the U.S. government. By one estimate, rising interest rates means the U.S. national debt will be $1.5 trillion larger than originally projected by the Congressional Budget Office over the next decade.
The ongoing bond market rout certainly hasn’t escaped the attention of Bessent or the Trump administration. Just over a month ago, the Treasury Department announced it was launching up to a periodic $4 billion bond market shopping spree to instill new confidence. When that wasn’t enough to calm investors, Bessent dialed it up to $6 billion. No luck: Investors simply haven’t been swayed by the Trump administration’s aggressive intervention into the bond market. They’re unnerved about the U.S. sitting on a $40 trillion mountain of debt and anxious about inflation setting in due to the Iran war.
So far, the ongoing spike showcases Bessent’s failure to artificially suppress yields and get the situation under control. He set out to be the “nation’s top bond salesman,” drumming up demand for these assets so that mortgage rates fall, along with overall borrowing costs. His approach has fallen flat.
Bessent does recognize that the so-called bond vigilantes — traders who rebel against government policies they view as inflationary or promoting market instability — can discipline spendthrift governments and inflict political chaos once provoked. In July, he observed that “the bond market has taken out more governments than howitzers.” Indeed, you only need to only recall former U.K. Prime Minister Liz Truss’s fleeting experiment in 2022 with an unfunded tax cut proposal that led investors to sell British bonds en masse. Chaos in the bond market pushed her to resign after just 45 days.
There’s another less-remembered episode about how even a careless interview can set off a backlash. In 2011, bond vigilantes targeted Italy under its then-Prime Minister Silvio Berlusconi. He criticized his austerity-driven finance minister to an Italian newspaper and it stirred fresh doubts about Berlusconi’s willingness to balance the Italian budget by 2014. Italy had a habit of financing social programs with government bond sales, even as its public debt breached new thresholds. It held the second-worst debt ratio in the euro zone, just after Greece. Soon, Italian bond yields shot up past 7%, which became a tipping point for action.
“Obviously, my old friends the Bond Vigilantes have been stirred and are now attacking Italy just as the barbarians invaded the Roman Empire many centuries ago,” financial analyst Ed Yardeni, who first coined the “bond vigilante” term, wrote in a blog post at the time.
The $32 trillion American bond market is generating a flood of headlines lately. Why? The instrument that the U.S. government uses to fund its own activities is going haywire.
Berlusconi stepped down in November 2011 with a technocratic caretaker government waiting in the wings to replace him. Thus Italy, where bond markets first developed in 12th century Venice, as recounted in Financial Times journalist Robin Wigglesworth’s new book, “A Fabulous Debt,” had a government ousted by its own invention.
Don’t bet on a similar episode of regime change in the U.S. anytime soon. Treasuries are still the backbone of global finance, and investors have long treated them as the ultimate escape hatch when chaos is spreading. Treasuries have seen better days than this.
Now bond vigilantes are testing the U.S. government’s appetite for punishment. In this instance, the Trump administration is proving to be a glutton.
“The U.S. bond market — it continues, during the past month, since President Trump has come in — has been the best-performing bond market in the developed world,” Bessent told a House panel earlier this month. He later dismissed critics as “Bloomberg Terminal bros” who are misguided about the U.S.’ economic and fiscal health.
The bond market isn’t buying what Bessent is selling. Whether that changes will rest on U.S. government credibility that’s still in short supply with another war in the Middle East still flickering on and off.
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