AFS Markets Blog: Midday 20/08/2026

• Meanwhile in markets, US Treasury Secretary Bessent’s intervention in the bond market to cap long end yields is strongly reminiscent of Japan’s FX interventions this year. The yenterventions have had a short half-life, with a large chunk of the recovery erased in a day or so, and with the remaining retracement taking place over the course over a couple of months;

• At pixel time, the 30y US Treasury yield was at 5.22. That’s up from a low of 5.18 and approaching the pre-intervention level of 5.28. For the record: the high this week was 5.34, which must have been Bessent’s line in the sand;

• The problem for Bessent is that, like Japanese officials, he has tied himself to the mast. A defense of the 30y begets (speculative) attacks and thus unbearable pressure to intervene again. Of course, fundamentals invoke such selling. The key metric being a headline US fiscal deficit of six percent of GDP. Which until the Biden/Trump presidencies was unheard of outside deep recessions or war. With such fiscal prolificacy, the federal government must pay in the price in the form of higher term premia and higher real rates;

• Fundamentally speaking – and there’s nothing that we didn’t know already – the US fiscal arithmetic is highly unpleasant. With a primary deficit of 3.5 percent of GDP, an effective interest rate of 3.44 percent and a debt ratio of 120 percent of GDP, the debt ratio rises by 1.5 percentage points annually. If all debt would be refinanced at the current market interest rate – say, the 5-year yield of 4.36 percent – then the debt stock will rise by three percentage points annually. See how current market interest rates are incredibly painful, especially on the long end?

• Then there is the symbolic and scary number that is 40 trillion dollars: the notional size of the federal debt. We just reached that milestones. Numbers that make the headline writers and the Zerohedges of this world foaming at the mouth;

• There is no solution in sight for the US fiscal predicament. A casual observer of US politics will notice that no one is proposing the austerity medicine to cut the deficit. Yes, the Trump presidency has fiddled in the margins with tariffs revenue. And Bessent is touting stronger AI-backed real growth. Now, if you believe that the US will grow itself out of its debt trap, I have this bridge for sale. In any case, without austerity we will either end up with default, inflation, or a combination of both;

• Turning to some lunchtime market commentary, European equities are down modestly, with US equity futures following suit. We’re seeing profit taking on the recent rebound in AI stocks dragging down the broader market plain and simple. Brent crude oil futures have edged higher and are trading just shy of $94 a pop at pixel time. So far, the first casualty of President Trump’s maximum economic warfare on Iran seems to be Jane/John Doe the motorist. Clearly, US officials’ attempt to jawbone crude lower by leaking information on ‘hidden’ Hormuz tanker transits haven’t kept oil prices in check. Markets are more worried about the remaining Iranian crude taken off the market or tit-for-tat air and drone strikes returning;

• The dollar is the biggest casualty of the Bessent intervention, with the Greenback setting new lows against both the majors and Emerging Market currencies today. In turn, Bitcoin is up eleven percent while gold is up a more measured two percent on the back of the Bessent intervention. EURUSD has reached the 1.17 handle even though French Bund spreads are widening further – on no news it should be emphasized. At 86bps, the Bloomberg generic 10y OAT-Bund spread is just 2bps below the post-Eurozone crisis high;

• As mentioned yesterday, France trades like a triple B member state. And wider than Italy or Greece for that matter. I ask myself: what are punters thinking? That if France defaults, Greece will be fine?

• ESTRs these days price a hike for the January 2027 ECB Governing Council meeting. Really. The only logical explanation I can think of is that President Lagarde exits in December and that the new President tries to make his or her mark by raising rates right of the bat;

• Today’s calendar is empty except for obligatory US jobless claims. As mentioned before, focus will turn to next week’s Fed Jackson Hole conference. Which means a barrage of central bank headlines.

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