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Hi Reader,

Happy Friday! Bizarre week of headlines, wasn't it? Tinned mackerel no longer contains mackerel. Jellyfish have shut down a French nuclear plant, again. And Trump has vowed that if voters defeat socialism in the midterms, every American will get $5,000 from the government. But what's that got to do with the price of fish?

In-depth: Global bond yields are soaring. Can we work out the reason why?
Newsbites: Oil back above $100, China bails out its banks, and Meta launches Muse.
PensionCraft News: Rate risk to your equity funds, the danger AI could hack our accounts, and what drives your withdrawal rate?

IN-DEPTH

House of Cards

"I have asymmetric information. I am the house now."

That was US Treasury Secretary Scott Bessent daring the bond market to bet against him. (A bold line for a man who works for one of the few people in history to have lost money running a casino. Several, in fact.)

So far, it has not been going well. A couple of weeks ago, the 30-year yield climbed to its highest level since 2007, at which point the Treasury announced it would "at least" double its regular buybacks of long-dated bonds, from $2bn to $4bn per operation. Yields briefly fell before giving Bessent the finger.

On Wednesday he went further still: $6bn per operation, enough to cut net issuance of 20-year-plus debt by roughly 27%. Bessent said the aim was to cool the "fever that was building" in the market, challenging traders to “bet against me if you want.”

They did want to.

Perhaps intervening in the bond market so brazenly is not the way to cool the fever? It just looks like you’re desperate. Ellen Zentner of Morgan Stanley — who also sits on the Treasury Borrowing Advisory Committee — told the FT there are "emerging-market-type risks" in such moves.

But Bessent is not one to back off.

"If some Bloomberg terminal bros are unhappy with what I'm doing, that's too bad." — Scott Bessent on Bannon's War Room

Ok, now it’s personal.

It takes me back to a difficult time roughly ten years ago when I’d been shown the door at the investment bank and was recently divorced from my Bloomberg terminal. I still think about it sometimes.

But Bessent is right in one sense. The market is unhappy with what he’s doing. Or at least, it’s completely unbothered by it. Which is arguably worse.

The 10-year yield, the benchmark for trillions of dollars of assets around the world, is edging towards 5% — seen by many as a psychologically important threshold. The 30-year already sits above 5.3%.

Part of the problem is that the market had wanted more. Morgan Stanley put the practical ceiling on buybacks at around $10bn per operation. But I doubt even that would have been enough to hold back the tide.

So why are yields rising in the first place? There’s no shortage of suspects.

Burning down the house

The simplest explanation for the sovereign debt problem is that there is too much debt. The US budget deficit is running at about 6% of GDP, the national debt has crossed $40 trillion, and the President is attempting to bribe voters with $5,000 cheques if they vote Republican in the midterms. A stimulus package on that scale would cost more than $1 trillion. Bessent’s $6bn hardly touches the sides.

The second-simplest explanation is that there is a war going on. Energy shocks are inflationary, and there is very little a long bond dislikes more than inflation.

And these things can always get worse. Oh, right, it just got worse. Yemen's Houthis appear to have taken control of the Bab al-Mandab area and hit Saudi Arabia's East-West oil pipeline. If confirmed, that puts the main bypass route around the Strait of Hormuz out of action.

US diesel prices have jumped above $6 a gallon for the first time — a price previously thought to only exist in Americans' worst nightmares, and in Europe.

House arrest

This brings us to the Fed, which meets next week with inflation at 3.4% and a three-way argument on its hands. Markets are pricing a 90% chance of a hike. Most economists expect rates to stay on hold for the rest of the year. And the President is demanding cuts from Kevin Warsh, his newly installed Fed chair.

Warsh has spent the summer talking like a man who might disappoint him. It wouldn't be the first time the President hired a dove and got a hawk — he made the same mistake with Powell in 2018 — though it would be a hilarious thing to do twice.

Crowded house

Another explanation is that the Treasury has competition. AI-related debt issuance is expected to reach up to $570bn this year, disproportionately at the long-end. And every dollar that goes into a Meta bond is a dollar that doesn’t go into a Treasury.

Dream house

The most cheerful explanation is that yields are rising because the economy is stronger than anyone expected and the bond market is repricing for a better future. After all, AI capex is real investment and real investment is supposed to push up real rates as growth prospects improve. This is the argument recently made by Stephen Miran, Trump’s former economic adviser.

A plague on both your houses

The most likely explanation is some combination of all these factors.

And of course this isn’t just a US story — sovereign bonds have been punished the world over.

In high-beta Britain, we feel the pain more than most.

The UK needs to buy energy on international markets, meaning we tend to import inflation. Roughly a quarter of our debt is index-linked, so the inflation goes straight onto the interest bill. And our fiscal headroom is slim and shrinking. To top things off, our politicians have form for doing silly things that make yields go up. None of this helps keep gilt yields in check.

Still, with yields now higher, buying bonds and holding to maturity is a viable option once more. Five per cent from the government, paid twice a year, isn't a bad way to make a living.

Just don’t bet the house on it.

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NEWSBITEs

Brent crude topped $100 for the first time since July. Fresh US strikes on Iranian tankers and Houthi attacks on Saudi oil facilities jolted the market. Brent is up about 66% this year, Hormuz remains shut, and US inflation is stuck at 3.4%, eight weeks before the midterms. Small potatoes, as the President put it.

The UK economy expanded 0.4% in July, defying forecasts of zero growth. Production and construction both contracted 0.5% over three months, but the services sector rode to the rescue. IT was the biggest contributor, with the ONS saying there was evidence “businesses involved with AI” boosted the sector. Overall output is 1.6% higher than a year ago. Britain didn't build the AI boom, but it will happily invoice for it.

The ECB raised rates to 2.5%, its second hike in three months. Eurozone inflation hit 3.3% in August, the highest since September 2023, with energy prices up 14.3%. Lagarde called the hike a "no-brainer". Where we’re going, we don’t need brains.

Beijing injected $54bn into eight state banks and insurers. The Rmb360bn package is funded mostly by special treasury bonds, though China’s state-owned tobacco monopoly also chipped in. It follows last year's Rmb500bn recapitalisation of four big lenders but is the first to reach insurers, with years of low rates squeezing their profits. The announcement was smaller than expected and recipients' shares duly fell. Where there's smoke…

Meta launched Muse, an AI agent that acts on users' behalf. Available in the US via WhatsApp or a standalone app, it can go shopping, book travel and run errands. Paid tiers cost $20 or $100 a month, making it Meta's first paid consumer AI product. I asked it to delete my Facebook account. It's thinking about it.