The bond market is beginning to revolt against America

Is the great sovereign debt crisis finally upon us? Perhaps not yet. But global bond markets are beginning to look distinctly more fragile, and the behaviour of the US Treasury suggests that those within the Trump administration have not only noticed. They are starting to panic.

With the US midterm elections less than three months away, Donald Trump and his administration are confronting an awkward economic reality. The president, in his bid to get re-elected, repeatedly promised cheaper money. Instead, long-term borrowing costs just keep going up. Last week, in a desperate bid to put a lid on yields, the Treasury said it would at least double its buyback of longer-dated government bonds, taking purchases to about $32-billion a quarter.

The stated justification is a classically Trumpian euphemism – “liquidity support”. That is technically true; the buyback programme was created in 2024 to improve market functioning. But that is not what is happening now. The political motivation is hard to refute. Thirty-year Treasury yields have touched their highest since 2007. Mortgage rates are back near 7%. For households promised easier financing conditions, and now facing higher gas prices and stubborn inflation, the Trump administration is proving even less capable than the Biden government at handling the economy.

Bessent putting a ‘plaster on a bullet hole’

What makes the latest intervention even more absurd is its futility. After briefly moving lower by 0.1%, long yields have since given up almost all their gains.

This is, of course, only the most recent attempt by Scott Bessent’s Treasury to coax long-term yields lower. The administration has relaxed capital requirements to make it easier for banks to hold long-term bonds. It backed the GENIUS Act, establishing a framework by which stablecoin issuers can become holders of US Treasuries, theoretically opening another source of demand as some traditional lenders to the US government – foreign governments like China and Gulf countries – start to tire. It also intervened to strengthen the yen, a move which conveniently reduced the incentive for one of America’s largest foreign creditors – Japan – to sell Treasuries in favour of buying its own debt.

None of these measures however has worked. The effects of July’s yen intervention began fading almost immediately. And even a doubling of Treasury buybacks remains tiny in comparison with the $31-trillion Treasury market, and the global forces that are pushing long yields ever higher.

The first of these forces is Japan. After a quarter of a century of dormancy, inflation has returned to Japan. Ten-year Japanese government bond yields, which compete with Treasuries for the same global pool of savings, sit at roughly their highest in three decades. With the Bank of Japan expected to resume raising its policy rate by October, the shift is only just beginning. For 25 years Japanese capital had nowhere to go, so much of it went into US duration. Now it will increasingly be inclined to stay at home.

The second force is even more powerful and has attracted far less attention than it deserves. The corporate bond market is being completely reshaped by the technology companies which are now tapping it on a scale that defies comprehension. To fund their astronomical capital expenditure on artificial intelligence, the US “hyperscalers” like Alphabet, Microsoft and Amazon are increasingly abandoning their reliance on free cash flow and turning instead to debt, borrowing record amounts of long money in the bond market.

The numbers are extraordinary. Goldman Sachs noted this month that US dollar investment-grade issuance has already passed $1.5-trillion this year, putting 2026 on course to eclipse the pandemic-era record. The bank had pencilled in $2.1-trillion for the full year but now suspects even that may prove too conservative. 

The average deal size year to date is $1.7-billion, the biggest of the post-financial crisis era. At least 20 transactions of $10-billion or more have been announced, a bracket that has come to be known as “jumbo”. Last year there were 12 deals of this size. In the previous three years put together there were 15 in total.

Ordinarily, transactions of this size would be associated with transformational mergers and acquisitions, such as the AB InBev and SABMiller tie-up. Not anymore. Two-thirds of the jumbo issuance comes from the technology sector. Alphabet sold $25-billion of bonds earlier this month, with maturities stretching out to 40 years. Amazon and SpaceX have been other massive borrowers.

The AI boom, in other words, is no longer simply an equity-market story. It is becoming a credit-market story too.

Japan, AI and US borrowing is a nightmare scenario

This is what makes the present moment unusual. At precisely the moment when Washington needs investors to absorb ever greater quantities of Treasury debt, one of the world’s great pools of structural demand – Japanese savings – is becoming less dependable, while a new source of competing supply – Big Tech – is arriving on an extraordinary scale. The net effect should be: greater supply of debt, fewer buyers, lower bond prices, and higher yields.

This is where the Trump administration’s strategy becomes contradictory, if not downright unrealistic. Where it might genuinely influence borrowing costs – by having an even remotely prudent fiscal policy – it has shown zero appetite for restraint. The extension of tax cuts has entrenched large deficits. Defence budgets soar ever higher. The fiscal shortfall is on course to widen even further this year.

Bessent’s interventions are treating the symptom rather than the disease. There is also a delicious irony here for his critics; he repeatedly attacked his predecessor, Janet Yellen, for supposedly manipulating the maturity profile of Treasury issuance to suppress long-term borrowing costs for political ends. Now he is doing the same, but more blatantly, only three months before midterm elections.

America still benefits from advantages no other borrower possesses. The dollar remains the world’s reserve currency. The US Treasury market is the deepest and most liquid pool of “safe” assets in existence. America has therefore been able to sustain debt levels, current account deficits and budget deficits that would have broken other countries. 

But privilege is not the same as immunity. Either the US begins to take its fiscal trajectory more seriously or markets will eventually force it to. Despite his sharp suits and hedge fund experience, no amount of financial engineering from Bessent will alter that reality. The AI binge on credit will only hasten the end game. He surely knows it better than anyone.

The time bomb is not yet exploding. But it is becoming harder to pretend that no one can hear it ticking. DM