Treasury Secretary Scott Bessent's plan to calm markets is being short-circuited

Long-dated U.S. bond yields surged again Thursday.

So much for the brief calm in the U.S. bond market.

Treasury Secretary Scott Bessent's latest effort to control yields on long-dated U.S. bonds was short-circuited after just one day as the U.S. national debt hit the $40 trillion mark and oil prices spiked as a result of the Iran war.

The 10-year Treasury yield BX:TMUBMUSD10Y jumped 6 basis points to 4.7% Thursday, giving back its retreat Wednesday - and then some - after the Treasury Department's announcement that it would be upping its purchases of long-dated U.S. government bonds in September.

"It's the equivalent of putting a few sandbags out once the flood has already started," George Catrambone, Americas head of fixed income at DWS Group, said of the beefed-up buyback plan.

Yields on the long end of the Treasury curve briefly pared their earlier gains after Bessent appeared on CNBC Thursday promising that the White House would soon take a look at spending and insisting that budget deficits would shrink.

The easing was short-lived. The Treasury Department declined to comment beyond Bessent's earlier comments.

The 10-year yields have been hovering around their highest levels of the last two decades, while the 30-year Treasury yield BX:TMUBMUSD30Y this summer jumped above 5%, this week hitting 2007 levels.

"What can't be ignored is the move in oil," said Mike Lorizio, head of U.S. rates and mortgage trading at Manulife Investment Management. That's a bigger factor Thursday than any notion of the market "rejecting" the increased U.S. Treasury buybacks, he said.

"Higher rates, in general, are more reflecting the oil market - for all the same reasons yields moved higher in the first place," Lorizio said.

Brent crude (BRN00) prices were up another 1.7% to about $93 a barrel, with no end to the Iran conflict in sight.

Yields have drifted higher along with oil prices over the course of the Iran war, now in its sixth month. The conflict has pushed up energy and gas prices for U.S. consumers, stoked inflation worries and spurred President Donald Trump to ask Congress for billions of dollars to support the war.

The Trump administration has been vocal about wanting to keep 10-year yields lower to help with the U.S. affordability crisis. Managing the makeup of the roughly $31 trillion Treasury market has been among the tools it has deployed in an effort to achieve that goal.

"Supply is one part, but supply isn't the biggest part," Lorizio said about efforts to put a lid on long-term Treasury yields. The artificial-intelligence build-out is also pressuring funding costs higher, along with concerns about the economy, inflation and the U.S. fiscal picture.

"Bessent probably felt it was time to draw a line in the sand and not let [yields] untether further," Catrambone said. But on Thursday, traders were demanding to get paid more for holding U.S. government debt.

This comes as investors have been pouring dollars into other asset classes. Investors were bracing for a potential $200 billion deluge of new corporate bonds to be issued in September, including from the "hyperscalers" funding the artificial-intelligence data-center boom.

"We are trying to keep the market in equilibrium," Bessent said Thursday, flagging the coming corporate-debt issuance deluge. Hyperscalers seem "almost yield-agnostic," he added, given the returns they expect on the AI build-out. "They don't really care what they are paying."

The U.S. stock market, where the S&P 500 SPX made record highs earlier in August, has pulled back only modestly this week despite the bond-market tumult.

Yet with Treasurys struggling since 2022 - and the growing U.S. national debt - some investors have begun to question whether they should consider ditching some bonds in their portfolio in favor of another asset class, like gold (GC00) or bitcoin (BTCUSD), which have rallied this week.

"There isn't a lot of motivation for Congress to bring down spending, and the Fed is talking hawkish, but sort of tolerating higher levels of inflation," said Jake Remley, senior portfolio manager at Income Research + Management, a bond-focused investment shop.

Investors who are growing more confident that the Federal Reserve will likely leave interest rates steady would be better off buying shorter-dated debt, which is more sensitive to expectations surrounding monetary policy, Remley said.

With inflation on track to remain above the Fed's 2% target for a fifth straight year in 2026, either the labor market or the pace of GDP growth would likely need to weaken to drag yields on the 30-year bond lower in the near term, he added.

"It has been kind of a perfect storm for bonds and maybe rightly so, with this supply picture and the inflation potential from the geopolitical situation, as well as all this Fed uncertainty," Remley said.

At the same time, yields are more attractive than they have been in decades, offering new buyers the opportunity to lock in higher coupon payments.

"People want to own Treasurys, for sure," said Lorizio at Manulife. "That being said, we do need to be finicky about pricing, given what we've been going though."

-Joy Wiltermuth -Joseph Adinolfi