A Warning from Markets to the US Treasury

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This week’s buyback announcement by the US Treasury is tiny in the big picture. It implies $14 billion in additional purchases on top of what was already scheduled for ten to thirty year Treasuries. Seen against the mountain of government debt held by the public - a stunning $32 trillion - this is peanuts and hardly worth fussing over.

So why did markets have such a violent reaction? The chart above shows the price of gold since January 2024. The vertical red lines are key events: (i) the November 5, 2024, election that got President Trump elected; (ii) the rollout of reciprocal tariffs on April 2, 2025; (iii) the dovish keynote by Chair Powell at last year’s Jackson Hole on August 22, 2025; (iv) the start of the war with Iran in the night of February 27, 2026; and (v) the most recent Fed meeting on July 29, 2026, which earned Chair Warsh lots of criticism. Gold is up over six percent since Wednesday’s buyback announcement, which is a big move. The chart below shows that the Dollar tumbled against the G10 (blue line) and emerging markets (black line). In fact, the Dollar versus emerging markets (EM) is in my opinion the best leading indicator for where things are headed and this index just fell below its pre-war low, which points to more Dollar weakness ahead. Markets definitely don’t think this week’s buybacks are small fry.

The reason markets are having such a violent reaction is because they’re extremely attuned to the risk that high-debt governments start fiddling with interest rates. I’ve written a series of pieces on how artificial yield caps in Japan are the reason the Yen is in a deprecation spiral for over five years. After all, if investors don’t get paid adequate risk premia, why would they hold your government bonds. Instead, they’ll head for the exit, putting depreciation pressure on the currency. Markets have closely watched and learned from Japan. They’re on the lookout for signs of anything similar happening elsewhere. This week’s buyback announcement - as long-term Treasury yields were making multi-decade highs - therefore understandably got a big reaction.

Treasury Secretary Bessent now has a problem. If you give markets a target, they’re going to start shooting at it. As the chart above shows, repeated interventions to lift the Yen were counterproductive because they encouraged markets to “test” - over and over - if officials would stand by their commitment to defend the Yen. The end result has been that interventions are happening with increasing frequency, their efficacy is falling over time and - most importantly - the Yen has continued its weakening trend. So it will now be with long-term Treasury yields. Markets will “test” Bessent over and over. The Treasury will have to do things to cap yields with increasing frequency and - every time it does that - gold will rally and the Dollar will tumble. The US is backing itself into a corner, from which the only way out is genuine fiscal adjustment.