Just dropped · Trial Balloon · Ep. 194
What Just Happened?
“Traders have made a bundle over the past year following President Donald Trump as the U.S. government pursues an unprecedented strategy of taking ownership stakes in publicly traded companies,” Bloomberg reports.
“But with the deeply polarized midterm elections approaching and polls suggesting the Democratic Party is likely to win a majority in at least one house of Congress, market strategists see rising risks of the administration’s equity positions.”
“Kevin M. Warsh, the chairman of the Federal Reserve, sought to alleviate concerns about his commitment to taming elevated inflation in a closely-watched speech on Friday,” the New York Times reports.
“Mr. Warsh, delivering his first address to the world’s leading economic policymakers at the Fed’s annual conference in Jackson, Wyo. affirmed that the central bank is chiefly focusing on getting inflation down after half a decade of it overshooting the Fed’s 2 percent target.”
“The Fed would not waver on that goal, Mr. Warsh said, although he stopped short of saying whether the current moment required higher interest rates.”
“A baseline assumption in asset allocation, regulatory policy and international finance has long been that U.S. Treasury securities are risk-free assets that offer protection against the vagaries of economic fortune. It may no longer be valid,” Axios reports.
“That’s the cold reality that lurks beneath the rise in longer-term bond yields in recent weeks that triggered a Treasury Department intervention.”
“It implies a world where the U.S. government can’t count on favorable borrowing conditions as a matter of course.”
The Guardian: The treasury bond mess: is this the demise of the U.S. as a safe haven?
“U.S. debt hasn’t been further downgraded, breakeven rates on inflation-protected bonds haven’t spiked, and the cost of insuring against a federal default hasn’t skyrocketed, signs that most investors still see U.S. bonds as a largely risk-free bet even if they have been demanding higher interest rates,” Reuters reports.
“That’s the good news.”
“Not so great is that developments in recent weeks have put U.S. federal debts and deficits in the broader context of an emerging era of higher global interest rates, stiffer competition for the next dollar of lending, and global geopolitical and demographic headwinds that other countries are also confronting. There may not be a crisis tomorrow, but the idea of a cliff somewhere in the future seems more tangible.”
The Guardian: The treasury bond mess: is this the demise of the U.S. as a safe haven?
“The Treasury could use its near $1 trillion General Account to help fund its recently announced plans to increase purchases of government bonds, according to two senior Treasury officials,” CNBC reports.
“Using the TGA would provide the Treasury with considerable firepower to influence long-term bond yields. The Treasury surprised markets last week with an announcement that it would be doubling the size of buybacks of off-the-run securities on the long end from $2 billion to at least $4 billion. Treasury Secretary Scott Bessent said on CNBC such operations could be even larger than the new higher minimum.”
“The Treasury Department’s announcement of a bond buyback stemmed a selloff—but not for long,” the Wall Street Journal reports.
Financial Times: Bessent takes on bond vigilantes in $32 trillion Treasury market.
Axios: Was the Treasury’s market intervention worth it?
President Trump took questions from reporters on the instability in the bond market:
REPORTER: The yields have come back up since then. Have you talked to him about another type of intervention? Is that something he will be doing?
TRUMP: We have many types of intervention. That’s one. The ultimate intervention is our military. And if we have to use that, we will.
“Economists have been repeatedly dumbfounded by the resilience of the economy in the face of the Covid-19 pandemic, wars, tariffs, inflation and sharply higher interest rates. A simple answer has provided a catchall explanation: the growth of artificial intelligence,” the New York Times reports.
“But the growth of A.I. also poses a risk, reflected in the nearly two-decade highs that yields on U.S. government bonds hit this week, prompting the Treasury Department to try to put a lid on borrowing costs.”
“That risk stems from a borrowing binge by some of the biggest technology companies in the world.”
“Kevin Warsh is trying to unwind years of explicit Federal Reserve guidance. Treasury Secretary Scott Bessent may have just complicated that experiment,” Axios reports.
“Why it matters: While the Federal Reserve chairman wants to give markets more room to respond to the economy, Treasury’s intervention signals that there are limits to how much market-driven movement Washington is willing to tolerate.”
“The result is a contradictory policy mix: The Fed is trying to do less to guide financial markets, just as Treasury is showing a greater willingness to intervene when market moves become uncomfortable.”
CNBC: Bessent moves to curb Treasury yields, putting new pressure on Warsh’s Fed.
“Treasury Secretary Scott Bessent has shown he’ll do unconventional things to get markets moving his way. His latest maneuver is his most radical yet,” the Wall Street Journal reports.
“Facing an uncomfortable rise in longer-term interest rates, Bessent took action early Wednesday when the agency he leads announced that it would significantly step up purchases of government bonds as part of its existing buyback program. Markets quickly responded in a way they haven’t to Bessent’s previous moves, with stocks rising and Treasury yields falling sharply.”
Associated Press: An alarmed bond market gets the Trump administration to act again.
“Many Federal Reserve officials believed that the central bank would have to raise interest rates if inflation did not ease, according to the minutes released on Wednesday from the Fed’s July 28-29 policy meeting,” Axios reports.
Bloomberg: Fed minutes show many officials said rate hikes may be needed.
“The cost for the U.S. government to borrow money hit its highest level since 2007 on Tuesday, the latest in a worrisome series of developments that have rattled global markets and American consumers alike,” the Washington Post reports.
“The sell-off in U.S. Treasury securities — at $31 trillion the world’s largest financial market — comes amid surging public debt in the United States, Europe, Japan and Canada; renewed conflict in the Middle East; and uncertainty about the Federal Reserve’s intentions.”
”The rise in long-term Treasury yields creates another headwind for the U.S. economy, one that will lift borrowing costs for businesses and consumers as well as official Washington.”
Bloomberg: Global bond slump raises Fed questions.
“Public opinion about the economy appears to be souring further this month, per the preliminary release of the University of Michigan’s consumer sentiment index,” Axios reports.
“The steepest month-to-month drop in sentiment was among survey respondents who identify as Republicans, with their outlook now 19% below readings from just before the Iran war and at the lowest since the 2024 election.”
“American drone companies got a sudden lift in the stock market Friday after President Trump announced plans to impose tariffs on imported drones,” Axios reports.
“Why it matters: National security experts have long bemoaned the American reliance on foreign sources for drone production, particularly China.”
“Federal Reserve chairman Kevin Warsh is attempting a high-wire act: He’s trying to fundamentally rethink the central bank’s approach to guiding the economy, while also using its standard policy toolkit to bring down stubbornly persistent inflation,” Axios reports.
“A market blowup late last month showed the perils of trying both at the same time.”
“The Trump administration this week sparked enthusiasm that the U.S. and Iran could soon strike a deal on the Strait of Hormuz, driving down oil prices and sending stocks soaring — only for no deal to emerge,” CNBC reports.
“If that sounds familiar, it may be because President Donald Trump has claimed dozens of times that the U.S. is close to an agreement that will end the war it began more than five months ago.”
“Investors have reacted to many of those claims with bursts of buying on hopes a breakthrough is near, even as the war instead appears to be widening and progress on Trump’s chief stated goal — containing Iran’s nuclear ambitions — is at a standstill.”
Axios: “Trump has transformed his second term into the most lucrative venture of his entire career, raking in more than $2.2 billion in 2025 from his family crypto empire, legal settlements and various licensing deals.”
”Truth API is the logical endpoint of that profiteering: the presidency’s unrivaled power to move markets, packaged and sold as a subscription.”
“In carrying out their first joint effort in a generation to boost the yen, the U.S. and Japan are seeking to contain tremors that could be triggered by a cratering Japanese currency,” the Wall Street Journal reports.
“The yen’s slide to a 40-year low indirectly threatened to bump up U.S. interest rates and risked throwing a wrench in plans to pull billions of dollars of Japanese investment into the U.S. “
“By propping up first Argentina’s currency and now the yen, President Trump is showing that he’s prepared to help allies who are battling financial markets, a contrast to the hands-off approach long favored by U.S. policymakers except in moments of exceptional peril.”
Taegan Goddard
Taegan Goddard is the founder of Political Wire -- which for more than two decades has been one of the nation's most influential political news sites.
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