Trump administration faces a major financial battle in the bond market

It has been 34 years since a group of savvy financial sharks pulled off the seemingly impossible feat of defeating the Bank of England through sheer market force. They bet against the pound sterling and succeeded in turning the markets against the central bank. The pound broke free from the European Monetary System, and a legend was born: George Soros, the speculator who brought down the former empire.

Today, one of the minds behind that operation is U.S. Treasury Secretary Scott Bessent. While Soros is a supervillain in the MAGA universe, Bessent is U.S. President Donald Trump’s chief economic adviser. And he is now fighting a new financial war, this time from the government side. The battlefield is the U.S. debt market, and the goal is to prevent interest rates from rising further.

Why have interest rates on US debt risen to record highs?

The yield on the 30-year Treasury reached 5.33% last week, its highest level since 2007, while the 10-year yield came close to 4.75%, also near highs not seen in decades. The main reason is the imbalance in the U.S. public finances. National debt surpassed $40 trillion last week, equivalent to 124% of GDP, and the budget deficit is projected to reach 5.8% this year, with little prospect of improvement.

Jerome Powell, the former Federal Reserve chair, often argued that the U.S. deficit is not unsustainable; the trajectory it is on, however, is. Meanwhile, with no peace agreement in sight with Iran, oil prices remain above $90 a barrel. Markets expect inflation to remain elevated for some time, at around 3.4%, prompting investors to demand higher yields as compensation.

And although U.S. Treasuries remain the global benchmark, the Treasury faces growing competition for investors’ money. From Europe and Japan to, increasingly, the technology giants, more and more issuers around the world are tapping debt markets.

Is this important for Trump?

Very much so. With the midterm elections just over two months away, interest rates are hitting Americans who are already grappling with high inflation. U.S. mortgage rates are closely tied to 30-year Treasury yields and have risen from 6% before the Iran war to 6.65%.

Lowering the cost of living, bringing down interest rates on government debt and restoring fiscal balance were three of Trump’s main economic goals, yet none has been achieved. After launching his tariff war in April 2025, it was rising debt yields that ultimately forced a truce. Now the White House has once again run up against the bond market.

“The possibility of losing control of long bond rates left the US Treasury Department with no choice but to surprise everyone,” said investment bank Edmond de Rothschild.

What did the intervention involve?

Last Wednesday, the Treasury announced a shift in its market strategy, doubling its buybacks of long-term government debt. The move caught investors off guard, as only two weeks earlier it had set out its plans for these operations. The impact was immediate: Treasury yields fell.

The effect, however, has proved limited. Before long, yields had begun climbing again, moving back toward the highs reached before the announcement.

What do analysts think?

“Attempting to cap yields at present feels like running up a down escalator,” said Warren Hyland of asset manager Muzinich. The measure is seen as more of a political signal than a tool likely to have a meaningful market impact. The additional buybacks are smaller than a standard Treasury auction, and they are being financed by issuing more short-term debt.

“The US Treasury’s attempt to dampen the rise under the guise of scaled-up liquidity operations has only drawn more attention to the underlying issue,” said ING.

Lazard investment bank expects U.S. deficits to exceed 6% of GDP every year over the next decade, with debt potentially reaching 140% of GDP by 2036.

Pimco, the world’s largest bond manager, does not foresee a debt crisis, but it does expect bouts of market volatility. “While capital flows and foreign exchange adjustments could serve as a release valve, deficit reduction is the only durable anchor for long-end yields,” it said. “We see little appetite for fiscal austerity.”

Can the Trump administration intervene in the market through other channels?

It already has, and just a few weeks ago. As part of the agreement reached with Japan earlier this month to stem the yen’s decline, Bessent also arranged an unusual dollar funding facility allowing the Bank of Japan to buy yen without having to sell U.S. Treasury bonds. The measure was preventive in nature. Japan is one of the largest holders of U.S. government debt, and the arrangement already hinted at Washington’s concerns.

The Trump administration has repeatedly shown a willingness to intervene directly in markets, from its pressure campaign against Jerome Powell and its on-again, off-again tariffs to the multibillion-dollar loan extended to Javier Milei’s Argentina and its shifting posture in the Persian Gulf in step with movements in Brent crude prices.

But influencing the bond market, a $32 trillion arena dominated by professional investors, the so-called bond vigilantes, is an entirely different challenge. “We would not dismiss the potential impact of further Treasury actions, particularly since policymakers have now signaled a greater willingness to intervene if market conditions deteriorate,” UBS warned.

What effects is it having on the broader market?

The bond market tends to be more stable than the stock market, but when it moves, the consequences are often far more significant, as finance ministers of every political stripe can attest. The yield on the 10-year U.S. Treasury is the world’s benchmark risk-free rate. Central banks, commercial banks and large investors looking for a safe place to park their money all hold U.S. government debt.

That is why changes in Treasury yields reverberate across global markets. When yields rise and bond prices fall, they distort relative asset valuations, reduce investors’ appetite for risk and increase borrowing costs for governments and companies alike.

For now, stock markets have remained resilient, but some of the shockwaves are already visible. Chief among them is the weakness of the dollar, which many analysts see as the main casualty so far, both because it reflects concerns about U.S. fiscal policy and because of the uncertainty surrounding possible further action by the Treasury. As in 2025, a weaker dollar has gone hand in hand with rising gold prices, as investors shift from one traditional safe-haven asset to another.

What role can the Fed play?

This latest bout of market tension comes just as Jackson Hole, the world’s premier gathering of central bankers, gets underway. In the past, the conference often served as a platform for the Fed to signal its policy direction. But the new Fed chair has chosen not to offer markets any guidance, heightening both anticipation and uncertainty.

French asset manager Natixis warned that expecting major monetary policy signals could prove disappointing and may even add to tensions at the long end of the yield curve. While Bank of America took a different view, arguing that Chair Kevin Warsh could use Jackson Hole to signal concern about rising long-term interest rates and help keep Treasury yields in check. The bank warned that, absent such reassurance, yields could climb as high as 5.5%.

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