Blain’s Morning Porridge August 20th, 2026 – Should we be worrying about bonds? Or worrying about everything else…
“There are more things in heaven and earth, Horatio, than are dreamt of in your philosophy.”
With US debt about the breach $40 trillion, Scotty Bessent intervened to stem rising long-end yields. The market loved it, but the reality is that distorting interest rates has all kinds of consequences. That includes the risk an economy focused entirely on financial returns isn’t spotting or addressing real world threats to jobs, growth, conflict, the environment and climate. Maybe it’s time to let rates normalise?
Key Takeaways
- Rising normalised Bond yields may be a cure rather than a crisis for overly financialised Western Economies.
- Cheap money distorts asset values, and economic behaviours.
- Bessent’s pump priming of the Long-End is market pleasing, liquidity enhancing, and confirmation the Fed Put is still there… but it’s like another round of Columbian marching powder at a slowing party.
- The legacy of 18 years of post 2008 GFC policy has been financial asset inflation, market froth, speculation and undeliverable market narratives that get buried in the expectation low rates will drive markets forever.
- Financially Sovereign Nations don’t default, but bad, financialised policy leading to inflation may ultimately unravel bond markets and make them unsustainable.
- Financial speculation, encouraged by policy distortions, distracts from the real-world requirements to enhance defence, infrastructure, housing, energy and resilience.
Interesting day in Bonds. As I write this morning, the US Debt Clock (the total the US Government owes) stands at $39.46 trillion – tomorrow it will the crash through $40 trillion. Yesterday, bond-salesman-in-chief, Scotty Bessent announced a massive buyback programme of US Long-Bonds, a move designed to bring down 10–30-year yields, seeking to reverse the growing concerns about the steepening slope of the US yield curve. It’s a move that looks political ahead of the US mid-term elections. Donald Trump wants and has promised lower bond yields.
We’ve been here before. Governments intervening in the bond markets trigger consequences. It’s like drugs. First it feels great – then the consequences start to mount. Pushing down interest rates has the effect of pushing up the value of all financial assets, which are priced relative to Bonds. Yesterday, the markets loved it. They anticipate a repeat high like the 2010-22 markets, so yesterday everything rallied – stocks, bonds, even buttcoin…
And I increased my Gold Position.
Rising bond yields had been threatening market sentiment. The investment chattering classes had been all a’panic about as yields rose through pre 2008 GFC levels! Shock! Horror! Is it the end of the World? Parts of the market are nervous it might be.
But the reality is that bond markets are simply normalising and that was probably a damn good thing. The rising yield on the US long-bond reflected a whole series of real world factors – rising inflation threats (mainly due to Trump’s war in Iran) causing investors to shorten duration, the potential changes in the buyer-base for US bonds from the end of the dollar age, and the structural consequences of the US Treasury having to increasing quarterly refinancing to reflect the shortening duration of new debt it’s been issuing. (By buying back long bonds and refinancing them with short-bonds Bessent is playing a dangerous game.)
Higher interest rates are the historical norm – the levels we’ve seen since 2009 and the beginning of the QE era were the anomaly. They’ve been artificially low. And by intervening to keep rates artificially low, Bessent is simply maintaining their distorting effect on markets.
Bond yields matter because government bond yields reflect the so-called Risk-Free rate in an economy, the interest rate all other financial risks are relatively priced off. For the nearly 2 decades following the 2008 GFC that risk rate was kept artificially low – the intention being to stimulate economic activity. Instead, pricing risk too low resulted in massive financial asset inflation and speculation… and the consequences of that are still in markets today.
Much of the spectacular rise in stock prices since 2010 is entirely due to setting the risk-free rate too low. Stock market participants are still fooling themselves the gains were due to their investment genius.
The reality, however, is the risk was mispriced. If the risk-free rate is set correctly then it should act as a disciplining force on borrowers to invest wisely. What happened post GFC was that low rates encouraged financial speculation – companies borrowed, not to build capacity, but to push up their stock price through buybacks and thus raise C-Suite Bonuses. Productivity flatlined – yet stock market valuations soared.
The whole US economy became financialised – supported by the depth and scale of the capital markets which effectively funnels cheap cash into the rising asset price narratives. And that, I suspect, is what terrifies Scotty Bessent. He’s aware the whole valuation of the US markets is built on something of a sham – if bond yields were to rise and start imposing financial discipline on US borrowers and investors, then much of the froth and speculation that’s been driving the apparent exceptionalism of US stocks, the narratives around the hyperscaling of AI infrastructure, and the never-ending cycle of stock-market generated wealth will slow.
If Bessent hadn’t intervened, the illusion stock-market prosperity could maintain the supremacy of the US economy might have cracked. On the other hand, to get real about the need to re-establish industrial capacity, create jobs, and address inequality, the US economy needs to refocus on the basics – and stop being addicted to stock prices.
Think of a functioning bond market like the control rods of the capital markets reactor. If you push them back in to normalise interest rates, then the market may slow, but the economy will then make investment decisions based on real reflected risks.
Meanwhile, and this may surprise readers, I am not overly concerned about bond yields being allowed to rise.
Yes, debt quantums across the Western Democracies are very high, and interest payments on bonds are significant. There will be almighty wailing and much gnashing of teeth when US debt breaks $40 trillion, and stories about “bond vigilantes” mounting buyer strikes which will force yields even higher.
For the record… here are where current Government bond yields, inflation, Debt/GDP ratios, and the average maturity of government debt were at the close of play yesterday. The scale of debt rollover is critical – much of the debt raised in the last 2 decades was priced close to zero percent!:
| 10-yr yield | 6m range | Inflation | Debt/GDP | Ave Maturity | |
| USA | 4.64% | 3.9 – 4.75% | 3.4% | 126% | 5.9 yrs |
| UK | 5.04% | 4.2 – 5.2% | 2.9% | 101% | 13.9 yrs |
| Germany | 3.2% | 2.5 – 3.3% | 2.8% | 65% | 7.8 yrs |
| France | 4.05% | 3.2 – 4.13% | 2.1% | 119% | 8.5 yrs |
| Japan | 2.9% | 2.0 – 2.95% | 1.6% | 205% | 8.7 yrs |
The consensus read is that Government Debt Quantums are too high and have become unsustainable. Governments are borrowing too much, and (according to who you read) spending in on all the wrong things… like welfare, education, health, defence, infrastructure, industrial policy, and fripperies like combatting climate change, strengthening international law, supporting less well-off nations, and investing in research… (pick the undeserving ones to cut.) To continue financing the rising levels of debt – yields must rise.
But the reality is bond quantums have been higher – during wartime – and have been worked down before. The fact that the AI hyperscalers are also pulling trillions in funding from markets demonstrates the fallacy of the “government debt crowds out the private sector from capital” argument about how government debt loads tend to slow growth.
However, the great truth of the markets is that bond buyers primary concern is the likelihood they are repaid principal and interest on a timely basis. They worry about credit deterioration but know that countries that have financial sovereignty don’t go bust. They can print more money – which has all sorts of other consequences.
What does concern them is the risk rising inflation will make diminish the future value of the dollar they lend the government today – which is why today’s rise in bond yields is mainly a reflection of rising inflation expectations as investors perceive problems ahead in oil prices, trade wars, supply chains, and, as I’ve written about this week – rising conflict risks.
My concern is that Scotty Bessent has just fed the market another dose of happy juice, at a time when the global economy needs to get serious…
Out of time, and back to the day job..
Bill Blain
Author of the Morning Porridge
CEO Windshift Capital
Advisor – Spitfire Strategic Capital
Meanwhile, don’t forget about my new book: The Battle for Hamble
You can read a review on the Society of Professional Economist’s website here.
