The "Saving U.S. Treasuries" Baton: Bessent Messed Up Last Week, Now It’s Up to Waller This Week

Yellen intervened to rescue the bond market, but ended up saving gold and bitcoin—in the end, everyone is now waiting for Powell.

Last week, US Treasury Secretary Yellen announced she would at least double the scale of long-term US Treasury buybacks in an effort to rein in the persistently rising long-end yields. The effect was immediate, but it only lasted less than a day—the yields soon rebounded to their previous highs and remained largely unchanged throughout the week.

Afterwards, Yellen said in an interview that the market "overreacted a bit," and emphasized that the Treasury has a "powerful toolbox." However, the market reacted differently: the US dollar fell nearly 1% for the week, gold broke through $4,600, and bitcoin surged more than 25% in a single week.

This combination was described by Nomura’s Charlie McElligott as a "pressure release valve"—while the authorities tried to stabilize long-term rates, market anxiety found its outlet elsewhere.

Key Focus This Week: Can Powell Provide Answers?

Now, the baton has passed to Federal Reserve Chair Powell, who will deliver a speech this Friday at the Jackson Hole Economic Policy Symposium.

Since taking office in May this year, Powell has provided almost no forward guidance. His last remarks following the FOMC meeting directly triggered a sharp bond market selloff—the market is extremely sensitive to what he says and how he says it.

According to Bloomberg, what traders most want to know is: given inflation stubbornly above the 2% target and the continually worsening fiscal situation, what exactly is the Federal Reserve’s policy response function?

TD Securities US Rates Strategist Molly Brooks warns: "If it’s just the same old story, I think the market will feel disappointed, which could accentuate the long-end selloff we’ve already seen."

HSBC Rates Strategist Dhiraj Narula believes, Powell has an opportunity to comfort markets through his messaging: 'If Chairman Powell can characterize potential inflationary pressures, in our view, that alone is enough to provide some rationale for lowering term premium associated with uncertainty.'

Bloomberg Markets Live strategist Michael Ball notes: Yellen can adjust the debt maturity structure, but only the Fed can anchor inflation expectations. Powell’s remarks at Jackson Hole must reiterate that the 2% target remains achievable and clearly state—if inflation persists, the Fed will act even if it means clashing with the administration.

Why Isn’t Yellen’s Move Enough?

Peter Tchir of Academy Securities points out that there are currently $7.5 trillion in short-term US Treasury bills (T-bills) and $21.7 trillion in coupon-bearing bonds outstanding. Yellen’s buyback operations are "at least $4 billion" each time, almost weekly—doubling from $2 billion to $4 billion per operation sounds impressive, but it hasn’t managed to sustainably move the market.

Tchir concludes this isn’t QE (Quantitative Easing). Yellen’s actions are essentially "rearranging chairs on the deck" and do not truly create new money. Market moves such as gold rising and the dollar falling reflect an overinterpretation of the "currency depreciation" narrative, not an actual expansion of money supply by the Treasury.

There’s another little-known but critically important fact: The Fed currently holds over 50% of all US Treasuries maturing in 10 to 15 years. This is far from a "free market." Meanwhile, the Fed’s share of long-term bonds is also close to 20%.

Even more paradoxically, the Fed also holds nearly $426 billion in coupon-bearing bonds maturing within a year, with an average coupon of just 2.9%, while the current effective federal funds rate is 3.63%—the Fed is continuously incurring a negative carry on this portfolio.

"Operation Twist": Can the Fed Do What Yellen Can’t?

Given this background, the market has begun revisiting a long-dormant tool: the Fed's "Operation Twist."

The logic is simple: If the Fed sells its $426 billion in short-term bonds and instead buys an equal notional amount of 20-year-plus long bonds, there will be an upfront accounting loss, but a significant carry gain (about 5.25% return vs. 3.63% funding cost). More importantly, this would absorb more than 15% of outstanding bonds with over 20 years’ maturity, effectively pushing down long-end yields.

From Powell’s point of view, "Operation Twist" isn’t QE, since it doesn’t change the Fed’s total notional bond holdings. This makes it more politically acceptable. Tchir’s assessment: if the White House really wants long-end yields to come down, it must give up Yellen’s "minor tinkering" and push the Fed to fully intervene with Operation Twist.

Bloomberg’s Ball holds a similar view: Yellen’s approach is increasingly like a "lite version of Operation Twist"—the Treasury uses buybacks to exit long-dated debt in favor of bills and short coupons; the Fed absorbs the front end by buying bills via reserve management, without expanding its balance sheet. However, this combo has an inherent contradiction: the higher the proportion of short-term financing, the greater the Treasury’s exposure to policy rates. If inflation forces the Fed to hike, interest expenses reset faster; if the Fed hesitates due to fiscal cost, markets will punish it with a higher term premium for its loss of independence.

Therefore, either the Fed steps in to support Yellen, or this intervention will end in failure—and failed interventions are often worse than not intervening at all.

Data Window: PCE as Lead Indicator on Wednesday

Ahead of Powell’s Jackson Hole speech, the market faces another critical data release—Wednesday’s Personal Consumption Expenditure (PCE) index for July.

According to Bloomberg, over the past month, inflation, employment, and retail sales data have all been in line with or weaker than expectations, leading traders to pare back near-term rate hike bets. If PCE data continues this trend, it may give Powell some breathing room for his speech.

However, the time window is closing fast. Bloomberg analysis points out that midterm election political pressures, coupled with the US Bureau of Economic Analysis updating PCE statistical methods at the end of September, could make post-September FOMC tightening moves even more politically sensitive.

5% Is Key: Doubts Linger Over the Durability of the Devaluation Trade

Wallstreet Insights writes, Bank of America strategist Michael Hartnett treats the 5% yield on 30-year Treasuries as a critical threshold—if it doesn’t break below, the pressure will intensify on the dollar and leverage-heavy sectors including mega-cap AI compute companies and private credit.

Bridgewater Associates founder Ray Dalio issued a warning last Friday, advising investors to reduce their bond exposure and hold gold and a certain amount of bitcoin to hedge against a possible US debt crisis.

This pressure is hardly imagined. Bloomberg notes that as Iran tensions escalate, fiscal outlook is increasingly in focus; meanwhile, there is a surge in AI-related corporate bond issuance, competing for the same capital as US Treasuries; and foreign investors’ demand for US Treasuries is becoming ever more 'price sensitive,' with tolerance for current policy direction waning.