Government intervention is not a long-term fix

Buying back long-dated sovereign debt is a perfect example of  a government attempting to manipulate the price of its sovereign debt.  To have this occur in the U.S. – in the world’s largest and most liquid sovereign bond market – is an effort that will ultimately fail.  This voodoo attempt to bring yields down at the long end of the curve by instructing the Treasury to scoop up long-dated bonds (financed by short-term bonds) is similar in most respects to the coordinated effort by the U.S. and Japanese governments to strengthen the Yen a few weeks ago, by buying Yen and selling U.S. Dollars (with the latter created through the sale of Euro’s, to the surprise of Eurozone officials).   Both of these ill-advised interventions are destined to fail simply because the underlying issues are simply not being addressed.  

Yen intervention

The Yen intervention which started at the end of July has been covered ad nauseum in the press (and in my blog).  Not surprisingly, at least some of the benefits of this intervention have faded, although the Yen (fortunately) remains below the ¥160/US$1.00 threshold for now, a critical psychological level for the Japanese government.   At the time of the coordinated intervention in the foreign currency markets by the US and Japanese authorities, the Yen had weakened to well beyond the threshold level (to ¥163/US$1.00), and was falling fast.  When the intervention was announced and undertaken, the Yen strengthened to ¥157/US$1.00, but has since faded back to around ¥159/US$1.00, knocking on the door of the implicit point-of-pain for the Japanese government.  How long the Yen will stay at this level is anyone’s guess, but mine is “not long”.

The reasons for Yen weakness are well beyond what I want to drift into in this article, although the main culprits involve a combination of “artificially” low policy interest rates courtesy of the Bank of Japan, the on-going attractiveness of the carry trade (because it is so cheap to borrow in Yen), the reliance of Japan nearly 100% on imported oil (which is denominated in US Dollars), and very high sovereign debt, the highest of all G7 countries at 235% gross debt-to-GDP.  One reason the last issue has not been more painful for Japan is that nearly half of the country’s debt is held by the Bank of Japan, and nearly 90% of debt (including the debt held by the Bank of Japan) is held domestically.^[1]

The message here is simple: the underlying issues in Japan need to be addressed for the Yen to stabilise, although – as you will see in the next section – the requisite steps which need to be taken often come with plenty of short-term pain. 

U.S. Treasury bond intervention

As far as the U.S. Treasury buying back long bonds, the benefits of this programme apparently spearheaded by Treasury Secretary Bessant scarcely lasted 24 hours.   Yields of the 10- and 30-year U.S. Treasury bonds zoomed in, but then gave back most of their yield improvement within 24 hours.  This voodoo economics simply isn’t going to work.  Total US debt reached $40 trillion on August 23, double the amount in 2016. 

To make matters worse, the annual deficit is soaring even in the context of a growing U.S. economy, a rather shocking assertion because it is in times of economic prosperity that the annual budget should shrink, not expand.  This is simply the price that is being paid because of poor Congressional budgetary policies and a presidential administration that is simply unable to grasp the reality of this situation, instead adopting a series of poor economic, trade and tax policies that have caused the deficit to soar.   And as much as the Trump administration and this Republican-controlled Congress are to blame, the poor fiscal management dates back to the early 2000s and cuts across both parties.  The last presidential administration to run a budget surplus was former president Clinton in the late 1990s.  It’s this simple – government bond yields today reflect a confluence of factors that have been caused by poor sovereign debt management for many years, with no willingness at all to address the fundamental issues in the way that they need to be addressed. 

In an article entitled “U.S. Treasury Yields: what’s next?” in December 2025, I concluded with the following:

“If I were asked to bet on whether yields would go up or down from here, I would have a bias towards higher yields because of the first three factors I mentioned above – long-term inflationary expectations, the worsening U.S. debt situation, and foreign players being less willing to buy new U.S. Treasury bills and bonds.”

As I constantly harp on about, strapping on duration from an investor’s perspective seems to be a fool’s game in an environment characterised by higher inflationary expectations (much higher than December 2025, thanks to the conflict between the U.S. and Iran), a deteriorating U.S. fiscal situation and – I would surmise – foreign investors continuing to try to diversify from the Dollar and U.S. Treasuries because of a lack of confidence in and reliability of the Trump Administration.  Since I penned the article above, the yield on the 10y U.S. Treasury has increased from 4.06% to 4.65%. (and this is down 10bps since mid-August highs).  Intervention from the U.S. Treasury at the long end of the curve is nothing more than window dressing and a short-term fix – the underlying issues need to be addressed for bonds to regain their lustre.

Year after year of increasing deficits have caused U.S. debt to reach $40 trillion, or 124% of expected 2026 GDP of $32.4 trillion. Interest expense on U.S. debt now represents 13.6% of the total budget.  With nondiscretionary expenditures (including Social Security and Medicare) dominating the budget and interest expense representing a growing percentage of the budget, only 22% of the budget is discretionary, which includes defence spending and social programmes.

Slashing government expenses will need to involve shared pain across the entire discretionary budget, and no single line item should be spared as there is no other way given the partisan approach in Congress.   Reductions in discretionary expenditures should be accompanied by measures to increase revenues, which makes me squirm since no one wants to pay more in taxes.  The reality is that neither the Republican party nor the Democratic party are able to take the requisite steps to address the issue of growing deficits, simply because a stern and much-needed stance on either the revenue or expenditure side will not get you re-elected.

Concurrently, should inflation remain well over the 2%/annum target and long-term inflationary expectations remain elevated, the Fed needs to do the right thing and tighten monetary policy to nip this issue in the bud.  I think an increase in the Fed Fund rates by 25bps would cause yields at the intermediate and long end of the curve to actually fall because this would represent a responsible approach to addressing long-term inflationary expectations, which are increasingly at risk of becoming baked in.   

Since I am feeling somewhere between nostalgic and beating a dead horse, I will direct you also to an article I wrote back in 2024 that you can find on my website: “US deficits / debt soar: should you care”.  And again, I will repeat the first paragraph of my conclusion in this article:

“How to apportion the requisite amount to reduce the deficit is for the electorate to decide, but one thing that should not be on the table is continuing to increase the deficit by increasing government expenditures and – at the same time – reducing taxes.  You have to consider it in a personal context – no one can spend money they don’t have without eventually getting in trouble.  As a taxpayer, you need to think about it the same way.   And also think hard about political promises to increase expenses without concurrent tax increases – this sways the uninformed portion of the electorate who “hears what they want to hear”.  Promises of more and more spending without raising (or even proposing to decrease) taxes is a formula for continuing to increase the deficit, a burden that could eventually prove problematic for future generations.”  

Yes, it is your children, grandchildren and future generations that will eventually own this problem, assuming my demographic is spared (although that remains to be seen).

Conclusion

Government intervention in markets is nothing more than a band-aid which fails to address long term structural issues.  Taking steps to address these issues will undoubtedly generate short term pain (most likely in terms of lost elections and slower economic growth), but these painful steps will eventually be necessary because each passing day – ignoring the real issues – will make the ultimate pain even more severe.  Should governments not act, investors will take matters into their own hands, and this never ends well.

As an investor, stay diversified and avoid duration risk (unless you are match funded), a mantra I have been preaching for a long time now.   And keep an eye out in the U.S. for rising yields – I hope this trajectory does not continue, because it will ultimately be very bad for equities, too. 

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^[1] To compare to U.S. sovereign debt profile, roughly 24% of U.S. Treasuries are held by foreigners (of which the Japanese government is the largest holder), and the Federal Reserve holds approximately $4.5 trillion, or 11%.  Commercial banks own less than 5% of U.S. Treasuries.  This makes the U.S. Treasury market more fairly priced (and more volatile) since professional investors are more influential than they are in the JGB market in terms of expressing confidence (or lack thereof), and “correct” pricing across the yield curve.