And guess what, the US Treasury’s announcement that it would triple the size of the initial bond buybacks, to buy up to $6 billion of outstanding securities set to mature in the 10- to 20-year sector, did nothing – absolutely NOTHING.

The US 10-year yield spiked past 4.83%, to the highest levels since November 2023, while the 20-year yield rose past 5.32% and hovers around the 5.30% mark – around the levels where US Treasury Secretary Scott Bessent came up with the brilliant idea that they would ‘at least double’ the size of the bond buybacks to tame the pressure on the longer end of the US yield curve.

Bessent says he is ‘the house’ (in his own, humble words) regarding the yen intervention he conducted with the Bank of Japan (BoJ). Today, the bond market gets to test whether he is the house in Treasuries, too.

Isn’t this pure irony?

Yes it is. Because back in 1992, Bessent was sitting on the other side of the table. He was running George Soros’s London office when Soros Fund Management famously bet against the British pound in the run-up to Black Wednesday – the day the UK had to withdraw sterling from the European Exchange Rate Mechanism (ERM).

At the time, the UK was trying to keep sterling within the European Exchange Rate Mechanism, effectively tying the pound to the Deutsche Mark. But the fundamentals were working against that policy: Germany needed high interest rates to fight inflation following reunification, while Britain was in recession and had a highly leveraged housing market.

In fact, around 90% of British mortgages were linked to short-term rates. That meant that if the Bank of England (BoE) raised rates to strengthen the pound, households would collapse under rising mortgage costs and the British economy would suffer a far worse recession.

As such, the Soros team concluded that there was no way the UK could sustainably defend sterling, and bet against it. On that famous Black Wednesday, British authorities did try to defend sterling by announcing rate hikes from 10% to 12% and then to 15%. In vain, markets didn't buy it. Britain eventually withdrew from the ERM and sterling collapsed.

Voilà.

34 years later, Bessent finds himself at risk of making the same mistake: thinking that the US Treasury can tame the longer end of the US yield curve by buying more bonds whenthe fundamentals are strongly working against that: energy prices are rising, inflationary pressures are mounting, Federal Reserve (Fed) is being politically pressured, US debt is soaring, the current administration is conducting an irresponsibly and unsustainably expansionary fiscal policy too, while appetite for US Treasuries has notably weakened amid repeated geopolitical and trade tensions, and foreign investors are increasingly looking at alternatives – gold being one of the most relevant ones. And Bessent thinks that buying $4+ billion of bonds could fix the problem.

Today’s market reaction was very clear – congratulations, bond markets! Treasury can buy $4, $6, $10 billion or potentially more bonds and temporarily improve liquidity at the long end. But it cannot make the underlying reasons investors demand higher yields disappear: rising oil prices, inflation concerns, massive government borrowing and uneasy questions around the US fiscal, trade and geopolitical policies.

Now, Bessent is not stupid. He knows – and says – that he cannot change the equilibrium price of Treasuries, and that he rather wants to slow things down. He could, however, end up realizing that his success with the Soros team was based on one simple fact: you can’t fight the fundamentals - not because he ‘is the house’! By the way, I hated that sentence.

Christine is also the house...

Moving to Europe – and in a rather more humble display of policymaking – European Central Bank (ECB) officials are expected to raise rates by another 25bp today, as the renewed surge in energy prices pushed headline inflation back above 3% in the euro area.

European politicians don’t enjoy it either, but what do you do? When inflation goes up, central bankers raise rates to tame price pressures (even though, in this situation, inflation is being pushed higher by external supply factors, not demand, and higher rates won’t make inflation disappear).

On the contrary, oil and gas prices only went higher after that data came in, suggesting that whatever the ECB does, upcoming inflation readings could only go higher. In the longer run, the idea is to slow economic growth ‘enough’ to counter part of the price pressures. In fact, higher global yields could, in theory, lower the threshold for ‘demand destruction’ in oil and limit the upside potential. So that’s the thinking: slow down the economy to reverse – or at least not add to – inflationary pressures.

Now, the bad news is that higher borrowing costs weigh on valuations. But the good news is that this week’s potential 25bp hike is almost entirely priced in, and even better news is that the Stoxx 600 gained more than 7% in the two months following the ECB’s latest interest rate hike (June 11). Q2 earnings were too strong for investors to worry about higher borrowing costs.

So, at this point, I can’t say that higher ECB rates (and higher European yields) will add more downside pressure on the Stoxx 600 (which has pulled back 3% since its August peak), but I predict that rising oil prices will lead to growing divergences within the index, keeping oil, energy and mining companies supported, while applying more pressure on industries that pay a high price to keep breathing. At the index level, who gets a bigger say will likely depend on how far energy prices rise.