Fed and US debt: why long-term yields keep resisting

The Federal Reserve and the US Treasury are sending two different signals to the bond market. The Fed is emphasizing that inflation remains too high and is leaving open the possibility of another rate increase. The Treasury is simultaneously expanding buybacks in selected long maturities to improve liquidity in a market where yields have returned to levels rarely seen in nearly two decades.

Despite the initial relief generated by the Treasury announcement, long-term yields remain elevated. That resistance suggests the issue now extends beyond the immediate path of policy rates.

Jackson Hole puts inflation back at the center

In his August 28 Jackson Hole speech, Kevin Warsh delivered his most detailed assessment of economic conditions since taking over the Fed. He reiterated that the 2% target measured by the PCE index is “firm and fixed” and said the central bank's predominant concern should now be prices rather than employment.

The figures he cited remain well above that objective. PCE inflation stands at 3.7% over twelve months and 4.1% over six months. More revealingly, 54% of the 199 components in the PCE basket have risen by more than 3% over the past year. Over the last six months, the share is 49%. Before the pandemic, only about 32% of components exceeded that threshold on average, according to data cited by Warsh.

Labor conditions look more stable to him. Unemployment is 4.1%, while four-quarter growth in spending on equipment and intangible assets is running near 9%. Warsh also estimates that more than half of the recent increase in capital expenditure can be attributed to the buildout of artificial-intelligence infrastructure.

He did not, however, announce a September rate increase. His language remains conditional: the Fed must be confident that underlying inflation is moving toward 2% “clearly and at sufficient speed.” Otherwise, he said, policymakers have “work to do.” It is therefore a monetary-policy signal, not a commitment about the next decision.

A rate increase is no longer a marginal scenario

The debate was already visible inside the FOMC. At the July 28-29 meeting, nine members voted to keep the federal funds target range at 3.50% to 3.75%, while three preferred a 25-basis-point increase. The minutes also show that several participants believed price pressures were broad enough to justify a more restrictive stance.

After Jackson Hole, markets quickly repriced the outlook. Reuters reported an implied probability of about 56% for a September increase, up from 36% before the speech, and about an 80% chance of an increase by December according to CME FedWatch. Associated Press reported odds close to 60%, compared with roughly 35% the previous day. These figures move continuously with trading and are neither an official forecast nor a guarantee of how the FOMC will vote.

The market reaction was concentrated in shorter maturities. Associated Press reported that the two-year Treasury yield rose to 4.34% from 4.22%, a maturity particularly sensitive to expectations for upcoming policy-rate decisions.

The Treasury is buying back more long-dated debt

The second move comes from the Treasury Department. On August 19, it said it would at least double the maximum size of certain buyback operations in nominal securities in the ten-to-twenty-year and twenty-to-thirty-year sectors. Beginning September 9, the ceiling will rise from $2 billion to at least $4 billion per operation through November 4.

The Treasury says the decision is intended to provide greater liquidity support in long-dated sectors where it regularly receives substantial volumes of high-quality offers. Treasury Secretary Scott Bessent later said the amounts could exceed $4 billion per issue.

The initial reaction was strong. Reuters reported that the 30-year yield recorded its biggest one-day decline since October after the announcement. But roughly half of the move had already been retraced by the following day. On August 20, the 30-year yield was trading near 5.24%, only about ten basis points below its August 18 peak, the highest since June 2007.

This does not prove that buybacks are ineffective: their official purpose is primarily to support liquidity and the larger operations do not begin until September 9. It shows only that the announcement was not enough to durably change the yield investors demand.

Why this is not a new Fed QE programme

The buybacks announced on August 19 are Treasury debt-management operations. They are not a Federal Reserve quantitative-easing programme.

The Fed still owns a very large amount of Treasuries. Its H.4.1 balance sheet released on August 27 shows roughly $4.546 trillion in Treasury securities held outright. During the week ended August 26, average Treasury holdings increased by about $7 billion. The rise came mainly from Treasury bills, which increased by roughly $7.3 billion, while nominal notes and bonds were unchanged at about $3.622 trillion.

The FOMC minutes explain the mechanism. The Fed is continuing purchases of short-dated securities designed to maintain what it considers an ample level of reserves. The Desk is authorized to increase SOMA holdings through purchases of Treasury bills and, if necessary, other securities with remaining maturities of three years or less. Principal payments from agency securities are also reinvested in Treasury bills.

This reserve-management framework is different from QE explicitly designed to reduce long-term yields and loosen financial conditions during a crisis. Warsh also said at Jackson Hole that unconventional policies may be appropriate in genuine crises but should otherwise be used sparingly.

Why long-term yields are resisting

A 30-year Treasury yield incorporates expectations for growth and inflation, future short-term rates, the supply of debt investors must absorb and a term premium compensating them for uncertainty over decades.

The first factor is inflation. Long-term inflation compensation remains, according to the July minutes and Warsh's speech, broadly consistent with a 2% objective. But the current PCE level forces investors to account for the risk that interest rates remain high for longer.

The second is debt supply and the scale of financing requirements. Reuters reported that total US public debt crossed the symbolic $40 trillion threshold in August. This is a gross public-debt measure and should not be confused with the narrower stock of marketable Treasuries held by investors. It nevertheless illustrates the scale of federal financing needs.

The third factor is competition for capital. Bessent has pointed to heavy corporate bond issuance, including financing for artificial-intelligence infrastructure. When companies issue more debt while the government is funding deficits, investors have more alternatives and can demand higher compensation.

The CBO projects $1 trillion in net interest costs

High yields have a gradual but mechanical impact on public finances. The Congressional Budget Office projects federal net interest costs of $1.0 trillion in 2026, about $69 billion more than in 2025 and an increase of 7%. The CBO estimates that the average interest rate on debt held by the public will be about 3.4% in 2026 and will rise toward 3.9% in the later years of its projection horizon.

Higher market yields do not immediately reprice the entire debt stock because much of it was issued at fixed rates. The effect spreads as securities mature, are refinanced and new debt is issued.

Reuters also reported on August 20 that interest payments so far in the fiscal year were approaching $1.2 trillion. That figure and the CBO's $1.0 trillion projection are not identical measures: the former refers to reported gross payments during the fiscal year, while the latter is a projection of net interest outlays.

The shock is already reaching mortgages

For households, housing provides the clearest transmission channel. Freddie Mac says the average 30-year fixed mortgage rate was 6.66% on August 27, compared with 6.65% a week earlier and 6.56% a year earlier.

That level remains high for borrowers and makes home purchases more sensitive to financing costs. Even a move of a few tenths of a percentage point can materially change the monthly payment on a thirty-year loan when home prices remain high.

The transmission extends to companies. Treasuries are a reference point for a large part of the corporate bond market, so persistently high sovereign yields raise the minimum cost at which companies can borrow. Industrial projects, electricity networks, data centers and infrastructure become more sensitive to the cost of capital.

Two institutions, two mandates

The situation should not be reduced to a conflict between the Fed and the Treasury. Their mandates and instruments differ, even if their decisions interact through financial conditions.

Fed officials questioned after the Treasury announcement emphasized their independence. St. Louis Fed President Alberto Musalem said monetary policy is set independently of debt management and fiscal policy. San Francisco Fed President Mary Daly said it was still too early to draw conclusions about the impact of the Treasury's changes.

Bessent also rejected the idea of a direct conflict. Those official positions do not prevent investors from assessing the interaction between the two policies.

The US shock is immediately global

Media coverage differs by region. In the United States, Associated Press emphasizes the jump in the two-year Treasury yield, rate-hike probabilities and the transmission into equities and borrowing costs. Reuters focuses more on bond-market mechanics and Treasury buybacks. The Financial Times frames the issue around the risk that measures aimed at easing long-term yields could come into tension with the central bank's inflation fight.

In India, Business Standard approached Jackson Hole through the gold market and its vulnerability to a more restrictive Fed. After Warsh spoke, Reuters reported that gold fell by more than 1% during the session. Business Standard also reported before the speech that India's benchmark 10-year government bond yield had reached 6.91%, its highest since June 11, although domestic factors also matter.

In Brazil, Folha de S.Paulo reported after the speech that the dollar rose 0.86% to 5.208 reais and the Ibovespa fell 0.41%. Those moves cannot be attributed exclusively to the Fed because Brazilian markets were also pricing domestic political and fiscal factors, but they illustrate how US rate expectations can quickly reach a major emerging economy.

Source biases and interests

US institutional sources are essential for balance-sheet data, FOMC minutes and the exact parameters of the buyback programme, but they naturally describe their own actions through their institutional mandates. They are therefore not, by themselves, independent assessments of policy effectiveness.

Reuters and Associated Press mainly provide market data and public statements, while the Financial Times adds more analysis of the Fed-Treasury relationship. Folha de S.Paulo and Business Standard place US market moves in their domestic contexts. Forward-looking analyst comments should be distinguished from observed data.

The South China Morning Post story cited here is a Reuters dispatch: it broadens regional distribution but does not constitute an independent corroboration. No specific financial conflict of interest involving the cited journalists was identified in the reviewed material.

What the market will reveal after September 9

Three uncertainties remain. Warsh has promised no rate increase and data released before the September 15-16 meeting can still change the vote. Market-implied probabilities observed on August 28 can move rapidly. Finally, the larger long-end buybacks begin only on September 9, so their actual impact on liquidity and yields cannot yet be measured.

If long-term yields remain near or above 5% after the expanded operations begin, that would suggest investors continue to demand high compensation for more fundamental reasons: inflation, debt supply, term premium and competition for capital.

Conversely, a sustained decline would not by itself prove that buybacks caused the move. Lower inflation, easing geopolitical tensions, weaker economic data or a change in Fed expectations could have the same effect. In a market of this size, isolating a single cause requires more than a correlation over a few trading sessions.

FAQ

Has the Fed launched a new massive programme to buy long-term US debt?

No. The expanded long-end buybacks announced in August are being conducted by the Treasury Department. The Fed is separately buying short-dated securities to manage reserve levels, which is not the same as a conventional new QE programme.

Why is the 30-year yield still high despite Treasury buybacks?

Because it depends on many variables: expected inflation, future policy rates, debt supply, growth, investor demand and the term premium. Buybacks can improve liquidity without removing those underlying forces.

What is the concrete effect on households?

Treasury yields influence many borrowing rates. Freddie Mac reported an average 30-year fixed mortgage rate of 6.66% on August 27. High sovereign yields also gradually raise financing costs for businesses and the federal government.