Oil prices near $110, Bessent’s repo failures, Trump’s “cash giveaway” triggers bond and stock sell-off

Original author: Dong Jing

Source: Wall Street Journal

Multiple negative factors strike simultaneously, delivering an unusual shock to U.S. financial markets. Oil prices surge to a four-month high, Treasury bond repurchase operations disappoint the market, and Trump’s pledge to spend over $1 trillion in direct payments—three pressures converge, sending U.S. bond yields soaring across the board. The 30-year Treasury yield hits a 19-year high, while the 10-year yield approaches the key psychological threshold of 5%, as equities also decline, triggering a "sell-off in both stocks and bonds."

On Thursday, the U.S. Treasury market faced multiple setbacks. The settlement price of Brent crude surged 6.3% in a single day to $107.63 per barrel, and rose further to $109 after hours. Wall Street Journal article noted that Thursday’s data showed the U.S. Producer Price Index (PPI) rising year-over-year to 5.4%, exceeding expectations; the bond buyback operation led by Treasury Secretary Scott Bessent failed to reach its $6 billion cap, with only $5.2 billion actually purchased, raising serious doubts in the market about its ability to stabilize long-term interest rates.

Meanwhile, Wall Street Vision article mentions that, according to CCTV International, on September 9 local time, U.S. President Trump, while attending the Republican midterm election rally in Dallas, pledged to distribute $5,000 to every adult American if Republicans succeed in gaining majority seats in both chambers of Congress during the midterm elections. According to estimates by multiple media outlets, the total cost of the plan is approximately $1.2 to $1.3 trillion, far exceeding the annual revenue from tariffs of about $190 billion, potentially exacerbating debt and inflation pressures.

The market reacted swiftly and sharply. The 30-year U.S. Treasury yield jumped 8 basis points to 5.37%, the highest since 2007; the 10-year yield rose 12 basis points to 4.943%, nearing its late 2023 peak; and the 2-year yield, more sensitive to monetary policy, surged 16 basis points to 4.59%, posting its largest single-day gain since the tariff storm of April 2025.

Stock markets faced synchronized pressure, with the S&P 500 falling 0.6%, the Nasdaq 100 dropping 0.9%, and the Dow Jones Industrial Average declining 317 points.

The situation in the Middle East continues to deteriorate, with oil prices becoming the primary catalyst for this round of bond market sell-off. According to media reports, the Houthi militia's occupation of a key port in Yemen, combined with a significant decline in Saudi Arabia's oil production, has jointly driven a sharp rise in oil prices.

Additionally, an OPEC report released on Thursday showed that Saudi Arabia's daily oil production in August was only 6.2 million barrels, the lowest monthly level since 2026, a sharp 23% decline from July.

Brent crude settled up 6.3% at $107.63 per barrel, rising further to $109 after hours, the highest level in nearly four months. Bob McNally, founder of Rapidan Energy Group and former energy adviser to President George W. Bush, said:

The oil market is correcting the largest pricing error since the 2022 Russia-Ukraine conflict, when the market was overly pessimistic about the scale and duration of supply disruptions, and is now overly optimistic.

Rising oil prices have directly boosted inflation expectations and strengthened market bets on a Fed rate hike. Data released by the U.S. Bureau of Labor Statistics on Thursday showed that the August PPI increased year-over-year to 5.4%, up from 4.7% the previous month and exceeding Wall Street expectations, with higher fuel costs being the main driver. Interest rate futures data indicate that market expectations for a Fed rate hike at next week’s meeting have risen from 49% a week ago to 71%.

Jim Burkhard, Vice President and Global Head of Crude Oil Research at S&P Global Energy, noted:

The market has not returned to calm, but is adapting to a new normal defined by unresolved conflicts and ongoing maritime risks—under which oil flows will remain below pre-war levels, and the outlook remains uncertain.

The Treasury's bond repurchase operation failed to stabilize the market and instead became a catalyst for a new round of selling. Last month, Bessent announced plans to at least double the size of long-term Treasury buybacks to $4 billion per operation, and on Wednesday announced the first increase in the upper limit to $6 billion—three times the previous maximum. However, results released Thursday afternoon showed that the Treasury actually purchased only $5.19 billion in 10- to 20-year Treasuries, below the $6 billion cap, despite market bids totaling $10.5 billion.

After the results were announced, long-term yields rose further, and market confidence in Bessent's ability to intervene clearly wavered. George Catrambone, Head of Fixed Income at DWS Americas, stated directly:

Bessent brought a water gun to fight a fire. Given current concerns over debt, deficits, and inflation, this is far from sufficient to calm the risk premium investors demand for holding U.S. 30-year Treasuries.

According to Bloomberg, some analysts remain cautious, suggesting that the Treasury's purchase volume below the cap may reflect a deliberate rejection of unfavorable seller offers rather than insufficient market demand. Bessent himself explained in an interview: "We only buy bonds when they're cheap. It seems everyone wants to hold onto their long-term bonds."

However, TD Securities strategist Molly Brooks noted: "This suggests that the Treasury's selection criteria have been stricter than usual. To meet market expectations and complete full buybacks to lower long-term rates, the Treasury may need to accept less competitive bids in the future."

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

Trump's promise of "cash payments" has worsened an already fragile fiscal outlook. On September 9, Trump announced that if the Republican Party retains control of Congress in the midterm elections, every adult American citizen will receive a $5,000 "dividend," a plan estimated to cost over $1 trillion. This statement has further intensified investor concerns about the continued expansion of the U.S. budget deficit, amid existing pressure on the bond market.

Wall Street Journal article mentions that this scale is nearly 70% of the United States' $1.8 trillion fiscal deficit last year, and does not include any additional stimulus spending. Without other sources of revenue, this expenditure will ultimately translate into new government debt. As of Tuesday this week, the total U.S. national debt reached $39.9 trillion, with $32.4 trillion held by the public.

Inflation risks are also significant. The current U.S. inflation rate has risen to 3.4% annually. Large-scale cash distributions could further stimulate household consumption, increasing demand-side pressure. Additionally, if large-scale cash distributions are ultimately implemented, heightened inflationary pressures may prompt tighter monetary policy, partially offsetting the economic boost from the cash stimulus.

According to the Wall Street Journal, the sustained rise in bond yields is partly due to growing market concerns over the expanding supply of U.S. government debt. Bessent previously stated that suppressing the 10-year yield was a top policy priority for this administration, but bond market trends suggest its credibility is being tested.

TD Securities interest rate strategist Pooja Kumra summarized:

Bonds are facing a double hit—oil prices continue to rise, while U.S. repurchase operations and increasing credibility risks are pushing up term premiums.

The 10-year U.S. Treasury yield is approaching 5%, viewed by markets as a key threshold that could trigger broader asset repricing. Sam Stovall, Chief Investment Strategist at CFRA Research, said:

I believe 5% is an emotional threshold; once breached, investors will become increasingly uneasy, which could lead to further market weakness.

The stock market has begun to feel pressure. Sectors sensitive to interest rate changes led the decline; 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.

Currently, some stock investors are choosing to temporarily ignore the turmoil in the bond market and are turning their attention to the upcoming CPI data on Friday and the Federal Reserve’s decision next week. Mark Hackett, Chief Market Strategist at Nationwide, said:

If Friday’s CPI data significantly deviates from expectations, will the stock market enter a more prolonged downturn? This is a greater risk than the somewhat arbitrary 5% yield threshold.