Bond sale costs reach 25-year high
The US government paid its highest borrowing costs to sell long-term bonds in a quarter of a century, after an auction of 30-year Treasury bonds on Thursday incurred a yield of 5.216%, the most since 2001. The sale of $25bn of 30-year bonds showed investors demanding a heavy premium to take on long-duration US debt, amid concerns over inflation and the country's rising national debt.
Michal Stanczyk, portfolio manager for the global fixed income team at Allspring Global Investments, said investors were being asked to absorb a growing supply of government debt globally at a time when deficits remain large and inflation uncertainty persists. If investors continue demanding greater compensation for inflation and fiscal risks, he noted, long-term yields could move higher and away from 5% even if Treasury auctions remain well covered.
Analysts pointed to a growing deficit driven by Donald Trump's spending plans, tax cuts, and the refunds on the president's tariffs as a factor pushing up borrowing needs. Gennadiy Goldberg, head of rates strategy at TD Securities, said the Treasury has to fund the government at more expensive levels.
Treasury doubles buybacks, but relief is short-lived
In response to rising bond yields, the US Treasury Department said it would at least double its planned purchases of longer-term Treasurys from September 9 through November 4, a policy that, according to the department, "reflects Treasury's desire to provide greater liquidity support" in longer-dated nominal sectors. The announcement initially helped stabilise the market, with yields dropping on Wednesday morning.
But the relief proved brief. On Thursday, US government bonds sold off again, pushing yields higher and keeping stocks under pressure as investors questioned whether the Treasury's support measures would provide lasting relief. The 30-year Treasury yield rose 5.4 basis points to 5.247% after falling to 5.1765% earlier, and the benchmark 10-year yield rose 4.7 basis points to 4.7%.
The buyback announcement unnerved some investors, who viewed it as a way to draw a line in the sand on long-end yields. Analysts noted the buybacks are not quantitative easing because there is no net liquidity injection, but the policy has generated credibility concerns and was behind a return of the debasement trade, which saw flows out of the US dollar and into gold, silver and Bitcoin. Lawrence Gillum, chief fixed-income strategist at LPL Financial, called the announcement "more of a band-aid than a panacea," adding that it did serve as a reminder that the Treasury Department is paying attention and will do what it can to keep yields from getting too high too quickly.
Stocks mixed, oil rises
Stocks were mixed as investors weighed the implications of the Treasury's actions. The MSCI index of global stocks rose 0.3% after falling for four consecutive sessions, its longest losing streak since March. Within the US, the Nasdaq fell 1% and the S&P 500 dropped 0.9%.
Elevated oil prices also hit sentiment. Brent crude futures rose 2% to $93.49 a barrel as disruption in the Strait of Hormuz showed few signs of easing. Earlier in the day, Brent had risen almost 1% to $87.88 a barrel after the Abu Dhabi National Oil Company reported two vessels attacked in the Strait of Hormuz. US stockpiles of distillate fuel, including diesel and heating oil, have fallen for three consecutive weeks, a trend that could keep upward pressure on prices. "You're hitting a point where inventories can become a problem," said Tom Samuelson, chief investment officer.
Semiconductor stocks rose on Thursday, although the broader market remained under pressure. Marta Norton, chief investment officer at Morningstar Wealth, said it was "penny-wise, pound-foolish for tech companies to worry about where the yield curve is," adding that the fundamental story for AI charges ahead regardless.
Fed minutes show deepening inflation concern
Minutes of the Federal Reserve's latest policy meeting, released on Wednesday, showed that concern about inflation deepened, with "several" policymakers appearing ready to raise interest rates and "many" saying a hike in borrowing costs would be needed if inflation does not decline to the 2% target. The Fed has been under pressure from President Donald Trump, who has lobbied for lower rates, but longer-term yields are set by investors in the bond market rather than by the Fed.
Kevin Warsh, the Fed chair, came into office in May after a tumultuous nomination process and has remained tight-lipped on his view on which direction the central bank is headed.
Inflation has proved persistent during the conflict with Iran. The annualized US inflation rate was 3.4% in July, down from a three-year high of 4.2% in May but nearly 1% higher than 2025 rates. AAA said oil prices this month are on track to be the highest ever recorded for August, with gas costing $4.08 a gallon, about $1 more than last year.
US pushes economic campaign against Iran
Amid the market turmoil, the US administration escalated its economic pressure on Iran. The two-month ceasefire between the US and Iran expired on Monday, and on Tuesday Donald Trump said there are currently no scheduled peace talks. Earlier in the week, he threatened to bomb Oman if it "gets in the way" of the US in the conflict.
President Trump promised the "most crushing" economic operation ever against Iran, and the US is urging allies and China to join an economic campaign to "collapse" the Iranian government. Tehran labelled the threat "economic terrorism." Treasury Secretary Scott Bessent said, "It is going to work in Iran and we are going to collapse this regime," adding, "You are either with us or against us." Bessent is expected to announce a sanctions package on Tehran and countries that conduct trade with Iran, with the details to be watched closely for their impact on energy prices and risk sentiment.
Global markets and currencies
The dollar index was up 0.06% at 98.89, while the euro was flat after earlier rising 0.16% to $1.1695. The yen weakened 0.6% to 159.12, even as the Trump administration intervened to prop up the yen in partnership with the Japanese government, which owns a large holding of US Treasurys. The US worked with Tokyo out of concern that Japan might sell Treasury holdings. The Bank of Japan is reportedly set to raise interest rates as soon as September.
In Asian markets, Tokyo's Nikkei 225 sank 3.2% and South Korea's Kospi slumped 5.8%. In Europe, the pan-European STOXX 600 slipped 0.12%.
Corporate earnings in focus
Strong earnings reports have provided some support to stocks. Moderna and Merck announced encouraging initial results from a study of a cancer vaccine they co-developed, sending Moderna up 138.4% and Merck up 12.4%. Estee Lauder rallied 17.4% after CEO Stéphane de La Faverie said a key measure of its revenue growth accelerated for a fourth straight quarter, and the company reported earnings per share of 39 cents, beating the 32 cents analysts expected. Target rose 5.9%, Lowe's added 2.8%, and Toll Brothers climbed 5.3% after reporting better profits. Broadcom fell 4.3%, the heaviest weight on the S&P 500.
NVIDIA is in focus ahead of its second-quarter results, expected Thursday, with consensus estimates of around $2.08 earnings per share and revenue of $92 billion. Reports emerged that NVIDIA has notified customers of AI server price hikes of more than 15% due to soaring memory costs, which could impact margins. The focus will be on guidance, data-centre demand, and the impact of memory costs on margins expected to be around 75%.
Outlook: Inflation data and Fed policy
The Fed's preferred inflation measure, the core PCE price index, rose 3.3% year-on-year in June, easing from 3.4% in May. Consensus expects core PCE to rise 0.2% month-on-month in July, leaving the annual rate unchanged at 3.3%. A hotter-than-expected print would lift the probability of a September rate hike. The interest rate market is pricing in 10 basis points of hikes for the Fed's September meeting and a total of 25 basis points of tightening for the remainder of 2026.
As investors digest the Treasury's buyback announcement, the bond market's reaction remains a key signal of confidence in the US government's ability to manage its debt burden. The initial reprieve faded quickly, and yields moved back toward highs, suggesting that the market remains wary of persistent inflation and fiscal pressures.