Markets thrive on narratives. Sometimes they’re grounded in data; sometimes they’re pure theatre. This summer, the script from Washington has veered closer to the latter.
On one stage we have Scott Bessent, US Treasury Secretary, proclaiming that “any model” suggests the Fed funds rate should be 150–175 basis points lower than today. It’s a breathtaking statement. At 4.3%, policy rates are already low by historical standards given inflation still running north of 3%. To suggest they should be closer to 2.6% is to erase seventy years of monetary history, from Paul Volcker’s 1980s crusade to today’s uneasy détente with price stability. The Taylor Rule — and every variant of it — points in the opposite direction.
On the other stage we have Donald Trump, talking about America’s “big, beautiful bills” as though indebtedness were a badge of honour rather than a constraint. Yet behind the bravado lies an inconvenient truth: the bill really is big, and it is coming due. The US must refinance around $10 trillion of debt over 2025–26. Net interest costs already exceed the defence budget. And debt-to-GDP, at roughly 120%, is on a trajectory few advanced economies would consider sustainable.
Fiscal dominance stops being theory
Put these two acts together and the script starts to read less like policy debate and more like fiscal dominance in real time. One arm of government pushes for lower rates to ease the rollover burden; the other leans on the central bank to comply. Investors used to ask, “what if?” Now they are starting to ask, “how soon?”
The problem isn’t just one of optics. When both the Treasury Secretary and the President undermine the Fed’s independence, markets don’t wait for the textbooks to be rewritten. They demand compensation — in higher term premia, steeper yield curves, and a credibility discount that can’t be unwound with a press conference.
Why this matters for bonds
For decades, Treasuries have been the anchor of global finance — “risk-free” by convention. But the surge in long-dated yields tells a different story. Investors are beginning to question not the creditworthiness of the US, but the terms on which that credit will be rolled over. A 30-year US Treasury yielding near 5% looks tempting in absolute terms. Yet if the driver is relentless supply and political interference in monetary policy, then the “risk-free rate” is anything but.
A global phenomenon, with a US accent
None of this is unique to Washington. The UK’s Debt Management Office is shortening issuance as defined-benefit pensions retreat from the long end. Yet even with curtailed supply, 30-year gilt yields spiked just below 6% last week — their highest since the 1990s — underscoring how fragile confidence is. Continental Europe faces a record calendar of sovereign supply. Japan, once the poster child for limitless government borrowing, is now dealing with the unfamiliar reality of positive inflation and political instability.
But scale matters. When the world’s reserve currency issuer toys openly with subordinating its central bank, the repercussions extend everywhere. Term premia rise not only in Treasuries but in gilts, Bunds, and beyond. Capital that once reflexively flowed to US debt now pauses, recalculates, and sometimes looks elsewhere.
Market implications
None of this is a call to abandon government bonds. Quite the opposite. In volatile times, duration is still a portfolio hedge. But investors should be precise about what they own, why they own it, and the risks embedded within.
- Government bonds: Five-to-ten-year Treasuries offer balance between duration risk and yields, though 10 year treasury yields have already declined nearly 0.5% since a mid-July peak at 4.5%, so don't provide as much compensation for duration risk as previously. In Europe, heavy issuance may cheapen valuations — potentially creating opportunities for patient allocators at higher yield levels.
- Investment grade credit: Still supported by strong fundamentals, but valuations leave little margin for error. Currently, GBP corporate bonds offer a yield premium of around 50 basis points over US corporates once currency hedges are applied — a meaningful edge, particularly in investment grade where starting yield is a strong predictor of medium-term returns. New issues with genuine concessions can be monitored opportunistically.
- Currencies: The US dollar is under pressure from several directions — weaker data pointing to imminent Fed cuts, and political interference eroding its credibility as a reserve anchor. The White House may pay lip service to a “strong dollar,” but policy tells a different story. Investors may consider diversification away from an unquestioned USD bias.
Final thought
The Art of the Deal was built on leverage, timing, and confidence. But in the bond market, leverage without discipline is a recipe for higher risk premia, not higher returns. Confidence, once lost, is costly to rebuild.
If today’s script is anything to go by, the US is no longer the master negotiator. The bill is large, the buyers are less price-insensitive than they once were, and the theatre is starting to wear thin.
For investors, the lesson is simple. Don’t mistake political theatre for value. Distinguish between price and risk. And remember: in bonds, the real art is survival.