Treasury Secretary Scott Bessent's surprise plan to tamp down US borrowing costs by expanding bond buybacks is showing measurable market impact despite ongoing challenges. Since Bessent's announcement last week, Treasuries have outperformed equivalent-maturity swaps, narrowing the 30-year spread between the two to the smallest since February. According to Bloomberg, benchmark US yields have also drifted lower after initially see-sawing in the wake of the government's plan to "at least double" its buybacks of longer-dated bonds. On Monday, CNBC reported that the department could use the Treasury General Account — the department's cash parked at the Federal Reserve — to finance these increased purchases of long-dated bonds, giving a further boost to the market. The 10-year swap spread has compressed too, with the gap three basis points smaller at around 39 basis points, while the 10-year US yield — which Bessent has said President Donald Trump's administration is targeting — is trading not far from 4.7%, remaining close to its highest level since early 2025. The 30-year Treasury yield is near 5.2%, within sight of their loftiest since 2007, showing the Treasury's intervention is having tangible effects on longer-duration bonds. Taken together, these moves amount to a Bessent Twist: supporting the long end of the yield curve by relying more heavily on short-term financing in the T-bill market, as reported by Investing.com India.
Market positioning data reveals a clear shift toward long-duration Treasuries as investors position for potential intervention benefits. According to Bloomberg, there's been a bullish tilt in the past week, as evidenced by a sharp run-up in calls relative to puts on US bond futures, which track long-maturity Treasuries. The so-called skews for futures on shorter-maturity Treasuries have remained closer to the neutral levels that have prevailed for several months. Across SOFR Sep26, Dec26 and Mar27 options, open interest surged in the 96.0625 strike, concentrated in Sep26 and Dec26 puts. In the four most populated strikes, open interest in Sep26 and Dec26 calls was more than twice as large as in puts, indicating traders are betting on potential further intervention. JPMorgan Treasury Client Survey reported more long and short positions, with neutral positions falling to 54%, the fewest since May 6, from 67%, showing increased market participation in long-duration strategies. The Bessent Put for bonds amounts to a signal that policymakers have options should long-term yields rise beyond levels justified by economic fundamentals, as reported by Investing.com India.
The AI investment boom is creating significant challenges for capital markets, with Nvidia effectively becoming the quarterly earnings report for the AI capital expenditure cycle. As reported by Investing.com India, some of Nvidia's largest customers have been told that prices for servers containing AI chips could rise by more than 15% in many cases as memory costs surge, affecting systems containing Vera Rubin and Grace Blackwell chips shipped early next year. The company sits at the center of an ecosystem stretching from semiconductors and memory through hyperscalers, utilities, data centers, private credit and increasingly gigantic bond offerings. US megacap technology companies have already issued enormous quantities of debt to finance the buildout, with Broadcom reportedly exploring more than $60 billion of additional financing. The Treasury's intervention strategy could be particularly relevant for these companies, as if the Treasury finances long-term purchases by issuing more short-term debt, it could increase its exposure to rising interest rates just as inflation appears ready to accelerate again. However, Bessent himself has acknowledged that AI investment is creating a short-term competition for capital, even if he expects those investments eventually to improve productivity and generate stronger non-inflationary growth. His suggestion to corporate chief financial officers has been straightforward: issue more debt in the middle of the curve, around five-year maturities, rather than competing aggressively with the Treasury for long-duration buyers.
The Federal Reserve faces significant challenges as Core PCE was still running at 3.3% year-on-year in June, comfortably above the Fed's 2% target. According to Investing.com India, headline PCED inflation rose 0.2% m/m and 3.7% y/y in July, while core PCED increased 0.2% m/m and 3.3% y/y, with both annual rates unchanged from June levels and remaining well above the Fed's 2.0% target for more than five years. The PCED for goods rose 3.7% y/y in July, with goods inflation expected to remain sticky as AI-related prices rise, energy disinflation fades, and tariffs continue to boost prices. The PCED for services held steady at 3.7% y/y in July, with "supercore" services PCED at 3.8% y/y, pointing to persistently sticky service-sector inflation. The hawks who dissented at the July FOMC meeting will likely push again for a September rate hike, arguing that inflation has remained above the Fed's 2.0% target for too long. The owlish majority appears to be following New York Fed President John Williams' framework, under which core PCED readings above 0.2% m/m could warrant a policy response, while readings at or below 0.2% would support a hold. On balance, we think the inflation data strengthen the case for a September rate hike, as reported by Investing.com India.
Consumer spending data confirms a slowdown as boosts from the World Cup, Amazon Prime Day, and OBBBA tax refunds faded. According to Investing.com India, real consumer spending was unchanged in July following a 0.4% m/m increase in June, while real disposable personal income rose 0.4% m/m, its strongest increase since January. July's saving rate rose to 3.0%, a four-month high, as income growth outpaced spending growth. A closer look at the flat spending reading shows most of the weakness was concentrated in goods spending, likely reflecting a slowdown following June's Amazon Prime Day boost, while spending at food services and restaurants rose a solid 0.4%. Redbook's same-store sales index was up 8.4% y/y in the week of August 21, well above its 2025 average of 5.8%, suggesting consumer spending remains resilient through the second half of the year. The good news is that the labor market is an important source of disinflation, as productivity gains have been offsetting hourly compensation increases, as reported by Investing.com India.
US markets are experiencing a correction while maintaining key support levels. As reported by Investing.com India, the Dow Jones has bounced from its longer-term bullish trendline, with the 70-session moving average around 52,000 providing another layer of support, while 51,600 is the key level for confirming the negative RSI divergence. The Nasdaq 100 remains trapped in a broader sideways range, with its 70-session moving average holding which keeps the bullish scenario alive. The S&P 500 is the index that deserves the most attention, having corrected while the RSI has formed a negative divergence, reaching 68 compared with 73 at the previous high, with key support at 7,350. On Friday, the S&P 500 rose 0.4% for just its second gain in the six days since setting its all-time high last week, while the Dow industrials jumped 1% and the Nasdaq composite climbed 0.4%. The VIX remains around 15, suggesting the market is dealing with a normal correction rather than a major volatility event. The Treasury's bond-buying strategy could influence this correction, as if the Treasury increases short-term debt issuance to fund long-term purchases, insufficient demand could push short-term yields higher, creating additional pressure on equity markets. However, the market's ultimate response to Treasury intervention depends on whether investors treat current yield levels as a temporary distortion or appropriate compensation for risk, with the 10-year Treasury yield returning to roughly 4.73% after the initial relief rally suggesting market skepticism remains elevated.
