This question keeps coming up — first Cash, now Bonds — so it’s probably time to address why the fixed-income market seems to be having a rough go of it lately…
This has been a confusing couple of weeks (years?) for market watchers and bond investors: Yen interventions; announced (but not yet executed) Treasury buybacks; sticky inflation; more (illegal) tariffs; a confusing muddle in the Iran war’s 6th(?) inning; a record $40 trillion debt. Perhaps we have even seen the return of the Bond Vigilantes! 1
What’s a bond investor supposed to do?
The short answer is to find ways to take advantage of higher yields – my preference is Munis and TIPs – but your answer will be dependent upon your specific age, income, tax bracket, and residence. While you think about that, perhaps an overview of the five 2 biggest crosscurrents currently impacting bond markets might help sort that out.
Inflationary Policies: Everybody has been tiptoeing around this; let’s just say it:
Tariffs + War = Inflation
The Tariffs I (before being struck down as unconstitutional at every level) raised prices on numerous imports, from food to finished goods; this is on top of the increase in grain prices caused by the Russian invasion of Ukraine. Then the U.S. war on Iran hit energy prices hard, followed by Tariffs II.
None of these policies show any signs of abating anytime soon. When inflation is sticky, it is all but impossible for the Fed to cut rates.
Federal Reserve Disruption: Historically, markets seem to challenge the FOMC whenever a new Fed chief takes over. In the current case, Kevin Warsh seems intent on disrupting the way the Fed does its job. From the five task forces Warsh created to review the Fed’s inner workings (!), to changes in how the Fed analyzes economic data, to reducing the number of meetings and dropping forward guidance, the new Fed chief has been antagonizing the bond market.
The tools at the Fed’s disposal include 1) higher federal funds rate, 2) size of the Fed’s balance sheet, 3) tighter financial conditions, or 4) some combination of all three. Now add two new strategies: changing the economic indicators the Fed relies on and dropping forward guidance.
The bond vigilantes’ response? Hitting the sell button on Treasuries, sending yields higher.
What is Neutral?: In case you forgot, the 2% Fed target was a made-up number with no academic or statistical significance that traces back to New Zealand in the 1980s. It made no sense in an era of fiscal not monetary stimulus, and is why I have been saying 3% is the new 2%.
For a variety of silly reasons – Credibility! Legitimacy! Change is scary! – the Fed has refused to revisit this simple truth. Rather than admit the error and move forward, the Fed has doubled down on an inflation target that will not be hit until there is a broad, deep, and painful recession. No thank you.
Bond Buybacks? If you think the financing of AI is circular, then what are your thoughts about the biggest issuer of sovereign bonds in the world buying back some piddly percentage of its own debt? At most, it barely impacts the short end of the curve; at worst, it is an admission of losing control of the narrative.
It is especially annoying to me since I spent most of the 2010s begging Congress to refinance the outstanding debt into 50- or 100-year Treasury bonds at the once-in-a-lifetime close to zero interest rates (See this, this, this, and this).
The bond market sets long-term rates—not the FOMC, not the Treasury Department, not Congress. James Carville was right…
$40 trillion in Federal Debt: Normally, I don’t pay much attention to deficits. After a half century of warnings, with none of the sky-is-falling dangers ever occurring, I have tuned out what is usually a partisan maneuver. For my entire adult life, as ginormous as the debt seemed, it was innocuous.
Two things make today’s version somewhat different: First, all of the elements discussed above have taken borrowing costs from historically inexpensive to suddenly pricey. On top of that, the profligate spending and tax cuts have accelerated how fast the debt level is increasing. Rapid debt growth and pricier servicing costs are a one-two punch that makes people nervous.
via Bloomberg
The Bottom Line: Pardon me for stating the obvious, but:
Disruption is Disruptive.
Despite clearly stated goals of price stability, lower interest rates, and slowing the growth of inflation, the bond market seems to be bearing the brunt of a series of self-inflicted wounds. From the Fed, there has been a series of questions about a lack of clarity; the Treasury is engaging in gimmickry; White House policies, as enacted, have been counterproductive.
Markets approach all of this from the perspective of Ralph Waldo Emerson, who said, “Your actions speak so loudly, I cannot hear what you are saying…” 3
Previously:
Let’s Talk About Cash… (August 12, 2026)
How Wealth Is Created in America (August 19, 2026)
The Evolution of Alpha (April 3, 2026)
Refinancing America’s Debt:
Fix infrastructure on the cheap while you still can (July 12, 2013)
Do We Need a 50-Year Bond? (May 12, 2014)
The Bonds That Can Cure America’s Ills (March 19, 2015)
Time for a 50-Year U.S. Treasury Bond (May 19, 2016)
Cost of Financing US Deficits Falls (December 18, 2020)
The Greatest Missed Opportunity of Our Lifetimes (October 23, 2023)
A Historic Missed Opportunity (June 3, 2025)
See also:
The Most Hated Asset Class in the World
by Ben Carlson
Wealth of Common Sense August 23, 2026
Druckenmiller: Let the Bond Market Speak:
Rising interest rates are a signal of trouble ahead. Artificially suppressing it heightens the danger.
WSJ, Aug 25, 2026
JPMorgan says Warsh failure to buttress Fed credibility may force a rate hike before year-end
by Dow Jones Aug 3, 2026,
The Government Report That Made Me Stop Trusting Our Statistical Agencies
Jared Bernstein Aug 22, 2026
Forget the bond rout, fund managers are in party mode
Robin Wigglesworth
FT, Aug 18 2026
JPMorgan says Warsh failure to buttress Fed credibility may force a rate hike before year-end
By Jules Rimmer
Marketwatch, Aug. 3, 2026
The Bond Market Is Returning to the Old Normal
Allison Schrager
Bloomberg, Aug 24 ,2026
KING CARNEY ACTIVATES KONG MODE WITH ZERO F*CKS
Carney Reads the Clock Like a Pro Wrestler
I F*cking Love Australia, Aug 22, 2026
__________
1. My friend (and neighbor, one town over) Ed Yardeni coined the term way back in 1983, while he was chief economist at E.F. Hutton…
2. If we wanted to add a 5th, then I would throw in the Private demand for capital. However, I am not (yet) convinced that the buyers of speculative AI capex boom high-yielding data center paper are the same allocators competing with the government for T-bills and Treasuries.
3. The full quote is: “Don’t say things. What you are stands over you the while, and thunders so that I cannot hear what you say to the contrary.” -Letters and Social Aims
Facts Only
* Yen interventions occurred.
* Treasury buybacks were announced but not yet executed.
* Inflation is sticky.
* Tariffs and the war in Ukraine raised prices on imports and grain.
* The U.S. war on Iran impacted energy prices, followed by Tariffs II.
* The Federal Reserve has faced disruption due to a new chief changing the methodology for analyzing economic data and reducing forward guidance.
* Bond vigilantes responded by selling Treasuries, raising yields.
* The target for the Fed rate was 2%, which is viewed as lacking statistical significance.
* Government debt reached $40 trillion.
Executive Summary
Full Take
The narrative pivots on the perceived failure of monetary policy and institutional consistency, suggesting that self-inflicted economic wounds are currently impacting sovereign bond markets. The tension arises from a disconnect between stated goals of inflation control and the actual trajectory of borrowing costs, complicated by external geopolitical pressures and internal shifts in central bank authority. The concept of "disruption is disruptive" implies that structural instability—whether from political maneuvering or methodological shifts—is overriding conventional economic management. The focus on debt levels is amplified because rapid growth in debt servicing costs, exacerbated by recent policy actions, introduces tangible risk beyond abstract targets. This signals a shift where market participants are prioritizing the observed behavior of issuers and regulators over historical norms, forcing a re-evaluation of what constitutes legitimate policy control.
Questions to consider: If traditional inflation targets are consistently missed due to external shocks, how should long-term bond pricing evolve? What is the structural relationship between institutional credibility (like the Fed's) and sovereign risk perception in an era defined by persistent fiscal expansion? How does the divergence between short-term yield movements and long-term debt concerns influence real economic planning for individuals?
Sentinel — Human
The text exhibits strong human markers, characterized by a distinct, passionate authorial voice blending market commentary with personal philosophy, rather than the detached neutrality typical of pure synthetic generation.