Oil prices nearing $110 + Bessant's "unhelpful" actions + Trump's "money handouts" = "double whammy" for stocks and bonds!

Multiple negative factors simultaneously triggered an unprecedented shock to the US financial markets. Oil prices surged to a four-month high, the Treasury's bond buyback operation disappointed the market, and Trump's promise of over a trillion dollars in "money handouts"—these triple pressures caused US Treasury yields to rise sharply across the board. The 30-year Treasury yield hit a 19-year high, and the 10-year yield approached the key psychological level of 5%. The stock market also declined, resulting in a "double whammy" of falling stocks and bonds.

On Thursday, the US Treasury market suffered multiple blows. Brent crude oil prices surged 6.3% to settle at $107.63 a barrel, and further rose to $109 in after-hours trading. An article on Wall Street Insights noted that data released on Thursday showed the US Producer Price Index (PPI) rose 5.4% year-on-year, higher than expected; the bond repurchase operation led by Treasury Secretary Scott Bessent failed to reach the $6 billion limit, with actual purchases totaling only $5.2 billion, raising serious doubts about the government's ability to stabilize long-term interest rates.

Meanwhile, an article on Wall Street Insights mentioned that, according to CCTV International News, on September 9th local time, US President Trump, while attending the Republican midterm election convention in Dallas, said he promised to give $5,000 to all American adults if Republicans successfully win a majority of seats in both the Senate and the House of Representatives in the midterm elections. According to multiple media estimates, the total cost of the plan is approximately $1.2 trillion to $1.3 trillion, far exceeding the annual revenue of approximately $190 billion from tariffs, and may exacerbate debt and inflationary pressures .

The market reacted swiftly and dramatically. The 30-year Treasury yield jumped 8 basis points to 5.37%, the highest since 2007; the 10-year yield climbed 12 basis points to 4.943%, approaching its peak at the end of 2023 ; and the 2-year yield, which is more sensitive to monetary policy, surged 16 basis points to 4.59%, the largest single-day increase since the tariff storm in April 2025.

Stock markets were under pressure, with the S&P 500 down 0.6%, the Nasdaq 100 down 0.9%, and the Dow Jones Industrial Average down 317 points.

Oil prices: a new inflation "trigger"

The deteriorating situation in the Middle East has made oil prices the key trigger for this round of bond market sell-offs. According to media reports, the Houthi rebels' capture of a major Yemeni port, coupled with a sharp decline in Saudi Arabian oil production, has jointly driven up oil prices.

In addition, a report released by OPEC on Thursday showed that Saudi Arabia's daily production in August was only 6.2 million barrels, the lowest monthly level since 2026, a sharp drop of 23% from July.

Brent crude oil settled up 6.3% at $107.63 a barrel, and rose further to $109 in after-hours trading, its highest level in nearly four months. Bob McNally, founder of Rapidan Energy Group and former energy advisor to President George W. Bush, said:

"The oil market is correcting the biggest pricing error since the Russia-Ukraine conflict in 2022. At that time, the market was overly pessimistic about the size and duration of supply disruptions, and now it is overly optimistic."

Rising oil prices have directly boosted inflation expectations and reinforced market bets on a Federal Reserve rate hike. Data released by the U.S. Bureau of Labor Statistics on Thursday showed that the Producer Price Index (PPI) rose 5.4% year-on-year in August, up from 4.7% in the previous month, exceeding Wall Street expectations; rising fuel costs were the main driver. Interest rate futures data showed that the market's bet on a rate hike at the Fed's meeting next week has risen from 49% a week ago to 71%.

Jim Burkhard, Vice President and Global Head of Oil Research at S&P Global Energy, pointed out:

"The market has not returned to calm, but is adapting to a new normal defined by unresolved conflicts and ongoing maritime risks—a normal under which oil flows will remain below pre-war levels and the outlook remains uncertain."

Bessent's "backfires": Buyback operation backfires

The Treasury's bond repurchase operations not only failed to stabilize the market but instead catalyzed a new round of selling. Bessant announced last month that it would "at least double" the size of its long-term Treasury bond repurchase operations to $4 billion per transaction, and on Wednesday announced an expansion of the operation's ceiling to $6 billion—three times the previous maximum. However, results released Thursday afternoon showed that the Treasury actually purchased only $5.19 billion of 10- to 20-year Treasury bonds, below the $6 billion ceiling, despite total market bids reaching $10.5 billion.

Following the release of the results, long-term yields rose further, and market confidence in Bessant's intervention capabilities was clearly shaken. George Catrambone, Head of Fixed Income at DWS Americas, stated bluntly:

"Bessent went into a firefighting with a water cannon. Given current concerns about debt, deficits, and inflation, this is far from enough to quell the risk premium investors are demanding to hold 30-year U.S. Treasuries."

According to Bloomberg, some analysts are skeptical, suggesting that the Treasury's purchases falling below the upper limit may be a deliberate rejection of unfavorable terms in sellers' offers, rather than a sign of insufficient market demand. Bessant himself explained in an interview, "We only repurchase when bonds are cheap. People seem to want to hold onto their long-term bonds."

However, TD Securities strategist Molly Brooks points out, "This indicates that the Treasury's screening criteria are stricter than usual. If the Treasury hopes to meet market expectations and complete the full repurchase to lower long-term interest rates, it may need to accept less competitive offers in the future."

Meanwhile, the Treasury Department also completed a $22 billion auction of 30-year Treasury bonds on Thursday at the highest borrowing cost in 25 years. The winning bid rate was 5.308%, up from 5.216% last month and the highest level since 2001. However, the high yield attracted enough buyers, and overall demand at the auction was strong.

Trump's "money handouts": Adding fuel to the fire of the fiscal cliff

Trump's promise of a "bonus" has exacerbated an already fragile fiscal outlook. On September 9, Trump announced that if the Republican Party retains control of Congress in the midterm elections, he will distribute a $5,000 "bonus" to every adult American citizen, a plan expected to cost over $1 trillion. This statement, against the backdrop of already pressured bond markets, further intensified investors' concerns about the continued expansion of the US fiscal deficit.

An article on Wall Street Insights noted that this figure is equivalent to nearly 70% of the US's $1.8 trillion fiscal deficit last year, and does not even include any new stimulus spending. Without other sources of revenue, this spending will ultimately translate into new government debt. As of Tuesday, the total US national debt had reached $39.9 trillion, of which $32.4 trillion was held by the public.

Inflation risks should not be ignored. The US inflation rate has already risen to 3.4% annually. Large-scale cash handouts could further stimulate consumer spending, increasing demand-side pressure. Furthermore, if the large-scale cash handouts are ultimately implemented, further inflationary pressures could prompt a tighter monetary policy, thus partially offsetting the economic boost from the cash stimulus.

According to the Wall Street Journal, the continued rise in bond yields is partly due to market concerns about the ever-expanding supply of US government debt. Bessant had previously stated explicitly that lowering the 10-year yield was a policy priority for the current administration, but the bond market's performance suggests that his credibility is being tested.

TD Securities interest rate strategist Pooja Kumra summarized:

"Bonds are facing a double whammy – rising oil prices and U.S. repurchase operations and increasing credibility risks are pushing up term premiums."

The 5% mark: a "sentiment tipping point" for the stock market.

The 10-year US Treasury yield is approaching 5%, a level seen by the market as a key threshold that could trigger a broader repricing of assets. Sam Stovall, chief investment strategist at CFRA Research, stated:

“I think 5% is a sentiment tipping point. Once it is broken, investors will become increasingly uneasy, which could lead to further market weakness.”

The stock market has begun to feel the pressure. Sectors sensitive to interest rate changes led the decline, with the Russell 2000 small-cap index falling about 1% and the S&P 500 materials sector dropping 1.5% on Thursday. All three major U.S. stock indexes have recorded declines so far this month.

Currently, some stock investors are choosing to temporarily ignore the bond market turmoil and focus on Friday's upcoming CPI data and next week's Federal Reserve decision. Nationwide's chief market strategist, Mark Hackett, stated:

"If Friday's CPI data deviates significantly from expectations, will the stock market fall into a more prolonged downturn? This is a greater risk than the somewhat arbitrary threshold of a 5% yield."

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