Weekly Wrap: The Bond Stupidlantes Show Up
Welcome back to Friday. This is the Breitbart Business Digest weekly wrap. You know what that means. We would say more but the longer version of our introduction was repurchased and retired by Scott Bessent.
This week began with everyone getting worried about the long bond, and then everyone got worried that the Treasury Department started buying long bonds. The Fed released minutes from the July Fed meeting, and no one noticed how hawkish they were. Meanwhile, the regional Fed banks and the Fed board reported much better-than-expected activity in the manufacturing sector.
Let’s go.
Everyone Got Worried About the Long Bond
The dumbest thing that happened this week is that the financial press and many Wall Street analysts became convinced that rising yields on long-dated Treasury bonds indicated a surge of investor anxiety over inflation. While it’s true that yields on the 30-year Treasury rose to their highest since 2007, this had nothing to do with inflation anxiety. The proof of this is that the yields on inflation-protected bonds did not rise significantly. Almost all of the climb in yields was due to a rise in real yields. That’s a signal that investors expect economic strength, not weakness or inflation fears.
Treasury bonds compete with other securities for investor dollars. When investors think the risk-adjusted returns of other investment opportunities are rising, they require higher returns in exchange for buying the government’s bonds. The way this is accomplished in the secondary market is that they pay less for bonds held by other investors, which pushes up the yield on the bond. If inflation expectations are not rising, which you can confirm by looking at the yields of Treasury Inflation Protected Securities or TIPS, then a rise in yields indicates investors expect the economy to produce more profits, better investment returns, and more growth.
The stock market figured this out quite a while ago, which is why stocks have done so well. In normal times, rising stock prices and optimism about the economy typically mean falling bond prices and rising bond yields. Falling stock prices are usually correlated with rising bond prices and falling yields, as investors engage in a “fight to safety.” When the Fed was engaged in extraordinary monetary policy, this relationship broke down, and bond and stock prices often moved together. What we’re seeing lately is a return to a normal, healthy financial market. But because of Trump Derangement Syndrome, this got treated like something was going badly wrong.
The Treasury Said It Was Going to Buy Some Long Bonds
Not that many years ago, Janet Yellen began a program of bond repurchases. This is probably best viewed as a kind of asset swap. The Fed buys older bonds that no longer trade very much while it keeps issuing new bonds that are more heavily traded. Investors who do not want to hold the less liquid “off-the-run” bonds can sell those to Treasury and use the proceeds to buy the more liquid “on the run bonds.”
This typically doesn’t receive a lot of attention because it does not matter all that much outside of the deep plumbing of the financial system. It increases bond market liquidity, which is something everyone used to worry about and nobody really does anymore. So that seems effective. Dealers—banks and securities firms that buy bonds in auctions conducted by the New York Fed—like it because they want to keep their balance sheets free of less liquid bonds. And sometimes the Treasury can squeeze a few pennies out the the repurchases of bonds that it buys at a slight discount because of the lower liquidity.
But when the Treasury announced this week that it was going to raise the amount of 20- and 30-year bonds it was willing to buy from $2 billion at each reverse auction to $4 billion, suddenly analysts and pundits started paying attention. The complaints were strikingly contradictory. On the one hand, Treasury Secretary Scott Bessent was accused of trying to impose his will on the market. On the other, people said that was impossible and Bessent would surely lose. Still others claimed this was evidence of an imminent collapse in demand for Treasurys with longer maturities.
Secretary of the Treasury Scott Bessent speaks to the press outside the West Wing at the White House on August 20, 2026. (Alex Wong/Getty Images)
The problem with all these views was the same: they made no sense. The Treasury knows that buying some extra bonds that don’t trade much will not have a lasting significant effect on yields. So, assuming that was the purpose of the operation was just wrong. And since the bond purchases do not reduce the amount of indebtedness or necessarily move the maturity of U.S. government debt, they aren’t an effective “rescue” or counter to market distress. This is not QE, where the Fed monetizes debt. It’s just a trade-in deal for bonds.
So we take it back. The dumbest thing that happened wasn’t the financial press worrying about rising yields. The dumbest things was the freak-out over an increase of $2 billion per operation in a market that trades tens of trillions of dollars of Treasuries every day.
Hold on a Minute: Hawks Were Hiding in Plain Sight
The market and much of the financial press appear to have underestimated just how hawkish the minutes of the Federal Reserve’s July meeting were. The superficial reading emphasized that nine of the 12 voting members supported leaving the federal-funds rate unchanged. But the real disagreement inside the committee was not between officials who wanted higher rates and those who wanted lower rates. It was between those who wanted to raise rates immediately and those who wanted to wait for more evidence before deciding whether to raise them.
Three officials—Beth Hammack, Neel Kashkari, and Lorie Logan—dissented in favor of a quarter-point increase. More important, “many participants” judged that policy tightening would probably be necessary if inflation did not decline. Some said financial conditions might not be restrictive enough to return inflation to two percent. A few of those favoring an immediate increase argued that moving now could prevent a steeper and more economically costly series of hikes later. There was no corresponding faction arguing for a rate cut.
The market appears to have fastened on the conditional clause: rates may need to rise “if inflation did not decline.” Because inflation data released after the meeting have been relatively benign, traders treated that condition as increasingly unlikely to be met. That is understandable as a forecast. It misses what the minutes reveal about the Fed’s disposition. The committee is prepared to react quickly if the improvement in inflation stalls, and much of the groundwork for another increase has already been laid.
As we read them, the minutes describe a Fed with a hawkish reaction function even if its baseline forecast is that inflation will continue to cool. That means it will not take much to turn the Fed toward hiking. Maybe just a bad inflation report, perhaps fueled by renewed upward pressure on gasoline prices because the war with Iran isn’t really ending. With markets placing only about a one-in-three chance on a September increase, investors may be putting too much confidence in the recent run of favorable data and too little weight on what the Fed has plainly said it is prepared to do.
This shouldn’t be all that surprising. Kevin Warsh himself is a bit of a hawk. How many times does he have to tell you that he will without fail return inflation to the Fed’s two percent target before you start to believe him?
The Manufacturing Boom Keeps on Booming
Two regional Federal Reserve surveys delivered surprisingly strong readings on manufacturing this week. The New York Fed’s Empire State index rose five points to 20.6 in August, more than double the consensus forecast and its highest level in more than four years. New orders, shipments, unfilled orders, employment, and hours worked all increased.
The Philadelphia Fed’s index climbed to 47.4 from an already elevated 41.4, crushing expectations for a decline to around 25. Employment rose to its highest level since April 2022, while new orders and shipments remained strong despite easing from July. Regional surveys can be volatile, but the simultaneous strength in New York and Philadelphia adds to the evidence that American manufacturing is gaining momentum.
And then there was the report from the Fed board on industrial output. It showed that national manufacturing output rose 0.2 percent in July after a revised 0.3 percent increase in June and was 1.2 percent higher than a year earlier. The details were stronger than the headline: production excluding motor vehicles increased 0.4 percent, durable-goods output climbed 0.7 percent, and business-equipment production rose 0.8 percent in July and 6.6 percent from a year ago. The manufacturing expansion is showing up in sentiment, employment, and actual output.
When America Decided to Claim a Big Island in the Ocean
Everyone freaks out when Trump glances toward Greenland. But he’s hardly the first president to look over the seas to a strategically placed island and wonder whether it should be part of the United States.
On August 21, 1959, President Dwight Eisenhower signed the proclamation admitting Hawaii as the 50th state. Congress had approved the Hawaii Admission Act five months earlier, ending a statehood campaign stretching back decades. Hawaiians then voted overwhelmingly to join the Union, with more than 94 percent supporting statehood in a June referendum. At four o’clock on the afternoon of August 21, Eisenhower declared that Hawaii had satisfied the requirements imposed by Congress and was admitted “on an equal footing with the other States.” Aloha!
President Dwight D. Eisenhower signs the proclamation adding Hawaii to the Union as the 50th state on August 21, 1959, in Washington, DC. Left to right front: Vice President Richard Nixon, President Eisenhower, and House Speaker Sam Rayburn. Rear: Lorrin Thurston, chairman, Hawaii Statehood Commission; Edward Johnston, Secretary of Hawaii; Interior Secretary Fred Seaton; David W. Kendall, who presented the papers to be signed; Senator-elect Oren E. Long (D-HI), and Representative-elect Daniel K. Inouye (D-HI). (Bettmann/Getty Images)
Statehood completed a long and often contentious political transformation. The Hawaiian monarchy had been overthrown in 1893; the islands were annexed during the administration of tariff champion William McKinley in 1898, and Hawaii officially became an American territory in 1900. But, in truth, the process had begun even earlier than that with the arrival of Yankee Christian missionaries, largely Connecticut Congregationalists, who successfully converted the island’s rulers and inhabitants from their traditional (and extraordinarily cruel) faith.
The annexation under McKinley was not without controversy. The president had originally sought annexation through a treaty with the Republic of Hawaii, but he couldn’t get the required two-thirds Senate majority. So Congress instead approved annexation by ordinary joint resolution, requiring only simple majorities in both chambers. Critics argued that a domestic statute could not extend American sovereignty over a foreign country and that annexation required either a treaty or the consent of the Hawaiian people.
An officer hoists the new United States flag decorated with its 50 stars during a presentation ceremony at the American Legion headquarters on August 21, 1959, in New York, following President Dwight D. Eisenhower’s proclamation that Hawaii had become the 50th State of the Union. (Photo by AFP) (Photo by -/AFP via Getty Images)
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