Exorbitant demand for money is putting upward pressure on interest rates…
Executive Summary:
Rising Yields and Treasury Interventions: Equity markets fell last week as the bond market saw yields rise, with the 30-year Treasury yield reaching its highest level since June 2007. In response, the Treasury Department implemented a new version of "Operation Twist" by doubling its longer-dated bond buyback program to $4 billion to alleviate pressure on borrowing costs.
The Structural Bond Supply Shock: A flood of new bond supply is hitting the market due to persistent government deficit spending, global mercantilist policies, and an unrelenting surge in AI-related corporate borrowing. Because this increased supply naturally leads to higher yields, it is unrealistic to expect a return to ultra-low interest rates while the global economy runs expansionary fiscal policies.
Portfolio Strategy Amid Restrictive Real Rates: Markets are currently pricing in a soft-landing scenario, overlooking the fact that 10-year real yields are sitting at a historically restrictive 2.5%. Investors should adopt a cautious near-term stance while maintaining a diversified portfolio weighted toward equities, gold, and commodities, alongside low-duration fixed income and cash.
Full Commentary:
Equity markets endured their first weekly decline in almost a month last week, with the Dow giving up -0.9%, the S&P 500 sliding -1.4%, the Nasdaq tumbling -2.1%, and the small-cap Russell 2000 declining -1.7%. The bloom continues to come off the rose that once shone on the SOX Semiconductor Index, which got clobbered -5.5% last week and is now down -20% from its June peak. Financials also appear to have lost their upside momentum, with the KBW Bank Index peeling off -4.1% in last week’s sloppy action. The bond market saw yields rise modestly despite a surprising announcement by Treasury Secretary Scott Bessent to upsize the Treasury buyback program (more on this below). The 30-year yield reached its highest level since June 2007, closing at 5.31% on Monday and pushing as high as 5.34% intraday on Tuesday.
Markets outside of equities responded exactly as expected to this mild form of “Operation Twist” by the Treasury Department by putting the old “dollar-debasement” trade back on in force. This showed through clearly in Bitcoin, which jumped more than +9% on Friday alone to a four-month high of $79,478 (+25% over the past six trading days). The prospect of a weakening dollar is pushing Bitcoin back into a bull market, as many investors increasingly view the cryptocurrency as a premier fiat hedge.
Gold is confirming this trend, climbing back above the $4,600 per ounce mark while gaining +5.2% last week. Other precious metals followed suit, with silver gaining +6.7% to $69.00 per ounce and platinum advancing +7.5% to $1,880 per ounce. The primary takeaway is that the Treasury Department’s increased repurchases are perceived as highly constructive for low-yielding real assets like gold and high-beta assets like Bitcoin. If the dollar succumbs to a growing lack of faith in U.S. fiscal policy, that should also be a tailwind for Emerging Market currencies, which rallied +0.8% last week—their best showing since late July.
The most significant macroeconomic development last week was Secretary Bessent’s announcement to double the size of an existing longer-dated Treasury buyback operation from $2 billion to $4 billion per operation. Pressures had been mounting in the bond market for weeks: 10-year yields had pushed above 4.70% and 30-year yields above 5.30%. It’s not just the absolute level of these yields, but the sheer pace of the selloff that has alarmed policymakers. The 10-year yield serves as the global benchmark off of which the broader economy is priced. With both mortgage and auto loan rates flirting with 7%, the administration is staring down a massive economic headwind.
If leaders in D.C. genuinely wanted to implement a durable, long-term solution rather than a band-aid to stave off a sovereign debt spiral, it would have been far more effective to announce an end to the past decade of fiscal dominance. Instead, this dynamic has led to an unprecedented public debt and debt-servicing burden. Six consecutive years of budget deficits exceeding 5% of GDP have undoubtedly pulled economic growth forward into the present, but at the direct expense of burdening the future. But who cares?
The White House seems to want to have its cake and eat it too—aching for lower market interest rates while simultaneously flooding the system with never-ending deficit financing. Another contradiction repeatedly touted by this administration is how "strong" the U.S. economy is, supposedly making it "the envy of the world." Humor me and let’s take that at face value: economic theory and empirical data both dictate that stronger economic growth naturally leads to higher interest rates. On this basis alone, rising yields are completely logical.
However, domestic growth isn’t the only force at play. The “America First” platform—encompassing the reindustrialization of American manufacturing, reshoring of national security supply chains, reducing reliance on foreign trading partners for critical materials, and demanding increased defense spending from allies—represents a groundbreaking shift in geopolitical relationships. The unraveling of the unipolar world order into a multipolar one has forced other nations to adopt more mercantilist policy frameworks. Cut off from unfettered access to American markets and faced with new geopolitical realities, global attitudes toward deficit spending have shifted. Canada, for instance, pivoted from attempting to balance its budget to investing heavily in infrastructure and adopting lower-tax, business-friendly policies to remain competitive. Even the historically frugal Germans officially reformed their constitutional debt brake in early 2025, exempting massive defense and infrastructure investments from their borrowing limits.
Countries have realized that the world order has forever changed, requiring massive spending at home. The era of global excess savings has ended. Between the U.S. government, corporate borrowers, and foreign nations, a flood of new bond supply is hitting the market. More supply means higher yields. It’s as simple as that.
Looking at the chart above, American yields are actually behaving quite well compared to the rest of the world. Expecting U.S. bonds to rally while global yields grind higher is foolish—unless the U.S. was in the midst of a massive recession. Given that U.S. gross national debt as a percentage of GDP is at an all-time high, structural deficits show no signs of improving, and the Federal Reserve has struggled to maintain its inflation target over the past few years, investors shouldn’t be surprised if the term premium in the bond market pushes even higher.
On the corporate side, the one thing the administration cannot control is the debt-financed surge in AI capital expenditures, which is proving unrelenting. This arms race has created a major duration supply shock, crowding out private demand for Treasuries in the process. Many of these tech hyperscalers are rated Investment Grade and are perceived by some investors as being of better quality than government bonds. While that isn't technically true, perception drives markets.
From 2020 to 2024, the five tech hyperscalers collectively issued an average of less than $30 billion in debt annually. In 2025, that figure more than tripled to over $100 billion. So far this year, issuance volume has already surged past $200 billion, heavily concentrated in longer-dated maturities. (Microsoft remains the notable exception, having largely avoided the bond market over the past year). Broader AI-related debt issuance is projected to surpass $1 trillion annually from 2027 through 2030. Yet, investors seem perfectly content accepting razor-thin risk premiums over Treasuries: Alphabet at +85 basis points and Amazon at +80 basis points, for example. Microsoft, maintaining its AAA rating, commands a spread of around +20 basis points, while Oracle remains the outlier at over +200 basis points. Aside from the anomaly of 2020/2021, corporate fixed-income issuance is currently the highest on record.
We have been lulled into believing that interest rates will stay forever low, but what we are witnessing is simply a return to normal. The core message is this: it is absolute insanity to expect the U.S. economy to run at a nominal GDP growth of 6.5%, paired with the most explosive corporate borrowing and capital spending boom since the railroads, a pedal-to-the-metal federal fiscal policy, and simultaneous expansionary fiscal policies across the globe—and somehow expect bond yields to fall.
You can’t have a booming global economy and rock-bottom interest rates. Attempting to force both risks letting inflation run away to the upside. The era of ultra-low bond yields is over. Markets and governments need to accept this new reality and adjust accordingly.
Finally, the confusion surrounding Secretary Bessent’s bond buyback last week is understandable, and its impact has predictably been fleeting. Doubling the long-dated buyback to $4 billion per operation is a drop in the bucket of a $32+ trillion Treasury market. With over $5 trillion in outstanding 20- and 30-year bonds alone, Bessent was merely testing the waters. He may need to scale up dramatically—much like Ben Bernanke did in September 2011 with the original "Operation Twist," which started at $400 billion and eventually scaled to nearly $700 billion. If the Treasury truly believes this intervention is necessary to correct market mispricing, the message to Bessent is simple: go big or go home.
The next shoe to drop is Fed Chairman Kevin Warsh himself taking center stage when he appears at the central bank's Jackson Hole Economic Symposium this Friday. All he really has to do is say something meaningful, and that includes sharing his updated thoughts on inflation and the economy given the slate of data released since the late July meeting. Perhaps he'll even give us his opinion on what Scott Bessent just tried to pull off in the bond market—especially since we know Warsh has been in regular contact with the White House lately. While some recent macro data has shown signs of softening, the underlying price numbers have remained stubbornly elevated, contradicting any narrative of a completely benign inflation environment. However, because higher market interest rates have effectively tightened financial conditions on their own, the market has walked back its most aggressive tightening expectations. Futures contracts are now pricing in just a 39% chance of a Fed rate hike next month (a move that felt like a near-certainty just a few weeks ago), with odds sitting around 63% for a hike by December.
There is also Nvidia’s earnings release on Wednesday, which may well be the number-one market mover. The company has become a definitive proxy for the broader AI ecosystem, spanning chipmakers and the institutions financing the rapid expansion of data center capacity. Crucially, Nvidia recently partnered with six major financial institutions (including Apollo, Blackstone, BlackRock, and KKR) to mobilize over $500 billion in third-party capital for AI infrastructure. This effectively transforms AI "compute" into a formalized, investable asset class—further cementing the massive capital demands driving the corporate bond supply shock.
Let’s round out this week’s missive with some closing thoughts attempting to intertwine these dynamics with portfolio positioning. Currently, the broader market is trading on the premise that inflation is moderating (despite the near-term risk of a bump driven by rising oil prices), growth data is cooling at the margin, the labor market is weaker than most objective observers would prefer, central banks are further away from tightening than feared, volatility is low, credit is firm, and corporate earnings are fantastic. Equities continue to look at the bright side of almost everything.
The fly in this glass of milk is elevated interest rates—in particular, 10-year real yields sitting at a historically restrictive 2.5% level. This is not a trivial detail. From my perspective, the level and direction of real rates remain central to understanding whether risk assets are being supported by genuinely improving fundamentals, easing financial conditions, or simply the blind expectation that easier financial conditions will arrive soon. At this point, markets (equities in particular) are behaving as if real rates at current levels are merely a temporary phenomenon. Yes, markets are forward-looking, but I would be remiss if I didn’t share my concern that investors are trading a lower real rate destination with absolute certainty, giving little respect to the prevailing restrictive levels.
The current market narrative is straightforward: growth slows, inflation moderates, the Fed eventually eases, and real yields move lower. In that Goldilocks environment, risk assets remain fully supported.
That is the soft-landing version of the story, and it is the scenario most risk assets are currently pricing in. This is the classic "bad news is good news" setup, keeping equities, credit, and gold buoyed. An alternative and far more problematic scenario is one where growth softens but real rates do not fall enough to compensate. Such a scenario would materialize if inflation remains sticky, fiscal dominance and heavy corporate issuance maintain upward pressure on long-end yields, and the Fed proves unable or unwilling to validate the aggressive easing currently priced in by markets. This is a highly unconstructive environment for risk assets, where cash is likely the only asset that performs well.
Broadly speaking, markets are trading the policy response rather than the data itself, interpreting slower growth as an immediate catalyst for easier policy and lower real rates. Such a view works as long as the transmission mechanism holds. Softer growth must ultimately translate into lower real yields. If it does not, equities may find they have already priced in the benefits of easing without ever actually receiving them.
This setup can persist for a while. Momentum is strong, volatility is low, and the Goldilocks narrative remains intact. But it is not a stable equilibrium, and eventually, investors will demand validation. If that follow-through doesn't materialize, I fear risk assets will reprice to a much less constructive reality where the cost of capital remains structurally higher than currently expected. Investors need to keep a close eye on the 10-year real yield: a decisive break below 2.20% validates the ongoing equity rally; persistence above 2.40% signals that this Goldilocks setup is running on borrowed time.
Bottom line: After a week like last week, where the investment backdrop experienced subtle tremors, it's easy to lean more heavily into the bear camp. I advocate fading that impulse. We need to see more significant and broader dislocations before inviting such a structural shift into our base case. That being said, I do think it is appropriate to adopt a more skeptical and cautionary stance in the near term as the macro setup has shifted into a far less friendly posture: oil is higher, interest rates are higher, policymaker interventions are piling up, and recent earnings from Walmart and Target did not paint a flattering portrait of the consumer.
My advice is as follows: respect and pay close attention to the risks, but don’t abandon the core view. Maintain a well-diversified portfolio of real assets overweighted toward equities, commodities, and gold, while ensuring that your fixed income and cash allocations remain low in duration.
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