Oil Prices Near $110 + Bessent's "Backfire" + Trump's "Handouts" = "Stocks and Bonds Slaughtered"

Original author: Dong Jing

Original source: Wallstreetcn

Multiple bearish factors detonated simultaneously, dealing a rare shock to U.S. financial markets. Oil prices surged to a four-month high, the Treasury's bond buyback operation deeply disappointed the market, and Trump pledged over a trillion dollars in "giveaway" spending—these three pressures combined to send Treasury yields surging across the board, with the 30-year Treasury yield hitting a 19-year high, the 10-year yield approaching the key psychological threshold of 5%, and stocks falling in tandem, staging a "double kill" in stocks and bonds.

On Thursday, the U.S. Treasury market suffered multiple blows. Brent crude settled up 6.3% in a single day at $107.63 per barrel, rising further to $109 in after-hours trading. A Wallstreetcn article noted that data released Thursday showed the U.S. Producer Price Index (PPI) rose to 5.4% year-over-year, above expectations; the bond buyback operation led by Treasury Secretary Scott Bessent failed to reach the $6 billion cap, with actual purchases of only $5.2 billion, raising serious doubts about its ability to stabilize long-end rates.

Meanwhile, a Wallstreetcn article mentioned that, according to CCTV International News, on September 9 local time, U.S. President Trump said at a Republican midterm election rally in Dallas that if Republicans succeed in winning majorities in both the U.S. Senate and House of Representatives in the midterm elections, he promises to distribute $5,000 to every American adult. According to estimates by multiple media outlets, the total cost of the plan would be approximately $1.2 trillion to $1.3 trillion, far exceeding the annual tariff revenue of about $190 billion, potentially exacerbating debt and inflation pressures.

The market reaction was swift and severe. The 30-year Treasury yield jumped 8 basis points in a single day 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; the 2-year yield, more sensitive to monetary policy, surged 16 basis points in a single day to 4.59%, the largest single-day gain since the tariff shock in April 2025.

Stocks came under pressure in tandem, with the S&P 500 falling 0.6%, the Nasdaq 100 dropping 0.9%, and the Dow Jones Industrial Average shedding 317 points.

Oil Prices: A New Inflation "Tipping Point"

The ongoing deterioration of the Middle East situation has made oil prices the core trigger for this round of bond sell-offs. According to media reports, Houthi forces seized an important port in Yemen, combined with a sharp decline in Saudi Arabia's crude oil production, driving oil prices sharply higher.

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, plummeting 23% from July.

Brent crude settled up 6.3% in a single day at $107.63 per barrel, rising further to $109 in after-hours trading, the 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 scale and duration of supply disruptions, and now it is overly optimistic."

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

Jim Burkhard, Vice President at S&P Global Energy and head of global crude oil research, pointed out:

"The market has not returned to calm, but is adapting to a new normal defined by unresolved conflicts and persistent maritime risks—a normal in which oil flows will continue to be below pre-war levels, and the outlook remains full of uncertainty."

Bessent's "Backfire": Buyback Operation Proves Counterproductive

The Treasury's bond buyback operation not only failed to stabilize the market but instead became a catalyst for a new round of sell-offs. Bessent announced last month that he would "at least double" the scale of long-term Treasury buybacks to $4 billion per operation, and on Wednesday announced that the cap for the first expanded operation would be $6 billion—three times the previous maximum cap. However, results released Thursday afternoon showed that the Treasury actually purchased only $5.19 billion of 10-year to 20-year Treasuries, below the $6 billion cap, even though total bids submitted by the market amounted to $10.5 billion.

After the results were released, long-end yields moved further higher, and market confidence in Bessent's ability to intervene was noticeably shaken. George Catrambone, head of fixed income at DWS Americas, said bluntly:

"Bessent is bringing a water pistol to a firefight. Given current debt, deficit, and inflation concerns, this is far from enough to calm the risk premium investors require to hold 30-year U.S. Treasuries."

According to Bloomberg, some analysts were more reserved, suggesting that the Treasury's purchases falling below the cap may have been a deliberate rejection of unfavorable portions of seller bids, rather than insufficient market demand. Bessent himself also explained in an interview: "We only buy back bonds when they're cheap. People seem to want to hold onto their long-term bonds."

However, TD Securities strategist Molly Brooks pointed out: "This shows that the Treasury's screening criteria were stricter than usual. If the Treasury wants to meet market expectations and complete full buybacks to push down long-end rates, it may need to accept less competitive bids in the future."

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

Trump's "Giveaway": Adding Fuel to the Fiscal Cliff

Trump's "giveaway" pledge has worsened an already fragile fiscal outlook. Trump announced on September 9 that if Republicans retain congressional control in the midterm elections, he will distribute a $5,000 "bonus" to every American adult citizen, a plan expected to cost over $1 trillion. This statement, against the backdrop of an already pressured bond market, further exacerbated investor concerns about the continued expansion of the U.S. fiscal deficit.

A Wallstreetcn article mentioned that this scale is equivalent to nearly 70% of last year's $1.8 trillion U.S. fiscal deficit, and does not even account for any additional stimulus spending. Without other sources of revenue, this expenditure will ultimately translate into new government debt. As of Tuesday, total U.S. Treasury debt had reached $39.9 trillion, of which $32.4 trillion is held by the public.

Inflation risks cannot be ignored either. The U.S. inflation rate has now risen to 3.4% annualized. Large-scale cash distributions could further stimulate household consumption and increase demand-side pressure. Additionally, if large-scale cash distributions ultimately materialize, further upward inflation pressure could prompt tighter monetary policy, partially offsetting the economic boost from cash stimulus.

According to The Wall Street Journal, the continued rise in bond yields stems partly from market concerns about the ever-expanding supply of U.S. government debt. Bessent had previously made clear that pushing down the 10-year yield is a policy priority for this administration, but bond market movements show that its credibility is being tested.

TD Securities rates strategist Pooja Kumra concluded:

"Bonds are facing a double blow—oil prices continue to rise, while U.S. buyback operations and growing credibility risks are pushing up term premiums."

The 5% Threshold: Stocks' "Sentiment Tipping Point"

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

"I think 5% is a sentiment tipping point. Once breached, investors will feel increasingly uneasy, which could lead to further market weakness."

Stocks have already begun to feel the pressure. Rate-sensitive sectors led the declines. On Thursday, the Russell 2000 small-cap index fell about 1%, and the S&P 500 materials sector dropped 1.5%. So far this month, all three major U.S. stock indices have recorded declines.

For now, some stock investors are choosing to temporarily ignore the bond market turmoil and turning their attention to Friday's upcoming CPI data and next week's Fed decision. Mark Hackett, chief market strategist at Nationwide, said:

"If Friday's CPI data deviates significantly from expectations, will stocks fall into a more prolonged downturn? That is the bigger risk than the somewhat arbitrary 5% yield threshold."