Recent volatility in the US bond market has intensified, prompting the US Treasury to proactively intervene and attempt to correct what it perceives as yield trends deviating from fundamentals. The Treasury has implemented measures such as expanding long-term bond repurchase agreements and signaling further policy easing in an effort to suppress long-term interest rates. However, the market generally believes that relying solely on the Treasury's actions is insufficient to stabilize the bond market in the long term and requires policy support from the Federal Reserve. Against this backdrop, Federal Reserve Chairman Kevin Warsh's policy stance, independence, and balance sheet planning have become key variables influencing US Treasury yield trends . The policy differences and potential collaboration between the two institutions have drawn significant attention from global financial markets.

The Ministry of Finance's large-scale intervention in the bond market has had a short-lived and limited effect.

On Wednesday evening, August 19th, Beijing time, the U.S. Treasury Department officially announced an upgrade to its Treasury repurchase program, doubling the size of a single long-term Treasury repurchase operation from $2 billion to a minimum of $4 billion. This expansion of long-term repurchases aims to support bond market prices and lower yields, while simultaneously offsetting the impact of the operation by adjusting the size of short-term debt. U.S. Treasury Secretary Scott Bessent stated that the U.S. has a comprehensive policy toolbox and still has room for further market intervention. Bessent indicated that the core purpose of this intervention is to send a policy signal, as current market yields do not truly reflect the fundamentals of the U.S. economy. Initially, the 10-year Treasury yield briefly declined, but the upward momentum was extremely weak, with the entire decline being reversed the following day, fully demonstrating the limitations of single-source fiscal intervention. Industry institutions pointed out that the Treasury Department lacks long-term tools for controlling liquidity, and to continuously anchor yields, it must rely on the support of the Federal Reserve's monetary policy.

The Federal Reserve's stance is ambiguous, and its policy approach is offset by that of the Treasury Department.

Market focus is now entirely on the upcoming Jackson Hole Economic Symposium, with everyone awaiting a clear policy signal from the Federal Reserve. Following the Fed's July meeting, Warsh's hawkish remarks were interpreted by the market as tacit approval of rising long-term bond yields. Former Cleveland Fed President Loretta Mester stated that it was precisely the uncertainty surrounding Fed policy that drove traders to further push up Treasury yields. Mester analyzed that the biggest problem in the market right now is the inability to accurately predict Warsh's policy logic; the Fed's policy response function remains unclear. In July, Warsh publicly expressed concerns about inflation risks but consistently avoided addressing the specific triggers for interest rate hikes. More importantly, Warsh has long advocated for weakening the Fed's independence, believing that the central bank should be subject to the overall constraints of the Treasury Department in key areas such as balance sheet management, breaking the traditional principle of independent monetary policy by the Fed. Warsh's core plan is to reduce the Fed's overall holdings and shift assets towards short-term bonds, an operation that would directly push up long-term bond yields, completely contradicting Bessant's goal of lowering long-term interest rates.

The implementation of the restructuring of fiscal and reserve powers and responsibilities has encountered obstacles, and policy competition continues to escalate.

Warsh proposed revising the 1951 Treasury-Federal Reserve Agreement in 2025. This agreement is a core cornerstone for defining the responsibilities and powers of the Treasury and the Federal Reserve and ensuring the central bank's independence. He stated that adjustments to the Federal Reserve's balance sheet have implicit fiscal attributes, and related operations must be approved by the Treasury Department. Currently, the Federal Reserve holds $6.7 trillion in financial assets, and its portfolio adjustments directly affect the Treasury Department's interest rate control objectives. The minutes of the Federal Reserve's July meeting show that the balance sheet adjustment plan has been submitted to a special task force for study, and the results will be released at the end of this year or the beginning of next year. There is no clear policy direction in the short term. Although Bessant stated that he would maintain coordination with the Federal Reserve, the two sides have not yet officially announced a specific cooperation plan, and the policy game between the two institutions will continue.

Summarize

In summary, the US Treasury has been actively intervening in the bond market, but its limited tools prevent it from independently achieving its long-term interest rate control goals. Meanwhile, the Federal Reserve's internal policies remain undecided, and there are inherent differences in top-level thinking between the Fed and the Treasury. Coupled with the restructuring of rules governing central bank independence, the US bond market is fraught with uncertainty. The upcoming Jackson Hole symposium will be a crucial juncture for observing the direction of US fiscal and monetary policy and predicting global interest rate trends. As of 12:18 PM Beijing time on August 21, the 10-year US Treasury yield was 4.703%.