Global share markets resumed their advance in August, supported by resilient economic data and a strong US earnings season. Technology stocks regained momentum after July’s weakness with the Nasdaq gaining 4.0%.
It was a big month for commodity prices with gold (+10.1%) on inflationary fears and oil (+5.2%) following renewed hostilities in the Straits of Hormuz, while even bitcoin was back in favour (+25%). This led to some huge moves for gold miners with the Gold Miners ETF (GDX) gaining 33%.
Closer to home the Australian Small Companies Index gained 5.2% for the month however this hid a sharp split with the resources component gaining 17% while industrials were flat.
Meanwhile at the Jackson Hole summit for central bankers, new Fed Chair Kevin Warsh sounded a hawkish tone. He noted that inflation is still too high (around 3.7%) however the US economy is resilient, and rate cuts aren’t coming anytime soon. The markets interpreted his comments as indicating a September hike is now more possible with the odds rising from 35–40% toward 55–60%.
Are the bonds vigilantes back?
Bond vigilantes – a term originally coined by economist Ed Yardeni in the 80’s – have become as visible as the tooth fairy in recent years.
The bond vigilantes, as a reminder, were the herd of professional investors who supposedly discipline profligate corporates and governments by demanding higher yields to buy their bonds.
Since the GFC it seemed the vigilantes had been consigned to the history books as it appeared there was no amount of government debt that could impact borrowing costs.
US economists Carmen Reinhart and Ken Rogoff famously claimed in the 2010 paper that economic growth would collapse if government debt exceeded 90% of GDP. Politicians and central bankers meanwhile were far more concerned about deflation than higher borrowing costs and the debt pile kept growing. Where was the risk? After all, Japan could borrow at 0% despite debt being 200% of GDP.
However, everything changed following the Covid pandemic when inflation was finally stoked to life by massive, unprecedented government stimulus programmes. Bond yields jumped on the prospect of higher inflation (see below) and have been edging up ever since.
Rising yields are putting government debt back in the spotlight
More recently bond yields have risen on the back of higher oil prices as a result of the US-Iran conflict with US 30-year bonds rising to their highest in almost 20 years, while the Japanese 10-year bond hit 3% for the first time since 1996.
This has coincided with the US national debt hitting a milestone in mid-August as it crossed $40 trillion for the first time. The debt has risen rapidly, adding roughly $200 billion per month amid large ongoing deficits (projected around $1.9–2.1 trillion for FY 2026, or about 6% of GDP), and is currently equal to around 125% of GDP, a post WWII record.
Interest payments alone have surged to a projected $1.0 trillion in FY 2026, equal to roughly 20% of total US government revenues and is forecast to reach about $2.1 trillion by 2036.
Despite this backdrop it was something of a surprise when Treasury Secretary Scott Bessent joined Japan in a coordinated effort to support the Japanese yen after it recently hit 40-year lows against the US dollar. The goal was to stop “disorderly” moves that could force Japan – who hold more than $1 trillion of US Treasuries – to sell those bonds and drive up American borrowing costs.
Bessent followed this up with an announcement that the US Treasury will double buybacks of longer-term bonds (10 to 30-year treasuries), raising each operation from $2 billion to at least $4 billion starting in September, the goal being to add demand to the long end of the curve which would help contain rising yields and keep borrowing costs from climbing further.
While the size of the intervention is tiny relative to the overall size of the bond market, it indicates that the Bessent as unlikely to sit idly by in a faceoff with the bond market vigilantes.
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