# A bond market rout of epic proportions?

_Treasury yields are back at 4.7% and the commentary has turned apocalyptic. Forty-five years of Fed funds and Treasury data say the yield curve is doing nothing unusual._

Neil Woodford · 21 August 2026 · 6 min read

![Scott Bessent, US Treasury Secretary](https://cdn.sanity.io/images/v3acfbvo/production/a41ff7594f5d274b6ea321e5e3640b4bd1ad8e0f-3360x2240.jpg?w=1600&fit=max&auto=format)

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This was another of those déjà-vu weeks in which the dominant themes of raised tension in the war of words between the US and Iran have driven up the oil price, which in turn has led to higher yields in all developed government bond markets, ultimately leading to a wobbly week for equities, and especially for those more exposed to consumer demand. 

A couple of other features this week, which I will comment on below, include the US Treasury Secretary’s interventions in the US bond market and some interesting inflation data in the UK, which once again highlight the material moderation in inflationary pressures in the first seven months of the year.

_[Watch: Watch this week's episode of The Show — The 7 Decisions Every Investor Faces (Part 1: The Funnel)](https://www.noisecancelling.co/the-show)_

## Still a war of words

I won’t go into detail on the daily war of words between the US and Iran other than to emphasise that although the two sides seem as far apart as ever, the military conflict remains, for the time being, in abeyance. 

Whether this current truce is a prelude to renewed military conflict is unclear, but for the time being President Trump seems focused on bringing further economic pressure to bear on the Iranian economy in the hope that this will eventually lead to some kind of compromise. It remains to be seen whether this strategy will succeed, but in the meantime, Gulf producers continue to find innovative mechanisms to transport large volumes of oil and gas out of the region, as we highlighted in [last week’s update](https://www.noisecancelling.co/read/perception-reality-and-a-record-high). 

Whilst most commentators remain deeply sceptical about Trump’s strategy, it is also undeniable, as [we argued back in April](https://www.noisecancelling.co/read/the-weapon-that-wins-wars), that the point of maximum Iranian leverage on energy markets appears to have passed.

_[Watch: Why economic pressure is the US's greatest weapon — The Iran War Is Already Over — Here's Why](https://www.noisecancelling.co/the-show)_

## The most interventionist Treasury Secretary in decades

_[Embedded media](https://www.bloomberg.com/news/articles/2026-08-19/bessent-becomes-most-interventionist-treasury-chief-in-decades)_

Bloomberg described Scott Bessent [this week](https://www.bloomberg.com/news/articles/2026-08-19/bessent-becomes-most-interventionist-treasury-chief-in-decades) as the most interventionist (in financial markets) Treasury Secretary in decades. This week, for example, Bessent has [announced that the Treasury Department would “at least double” its planned purchases](https://home.treasury.gov/news/press-releases/sb0607) of issued 10- and 30-year US government debt after [earlier announcing potential cuts in issuance of longer-dated debt](https://home.treasury.gov/news/press-releases/sb0590).

This comes after the end-July announcement of US purchases of Yen designed apparently, to arrest its decline against the dollar, which might have persuaded Japanese holders of US Treasuries to sell. _(Neil in the margin: When a government buys another's currency it's a foreign-exchange intervention: buying yen props up its value against the dollar. The logic here is that a weaker yen tempts Japanese institutions — among the largest foreign holders of US Treasuries — to sell them, which the US would rather avoid.)_

### What 45 years of data actually say

This all comes after Bessent [highlighted in a speech in November](https://home.treasury.gov/news/press-releases/sb0314) that his job was to be “the nation’s top bond salesman…and that Treasury yields are a strong barometer for measuring success in this endeavour.” 

Either way, this intervention appears to have calmed what some quarters saw as a bond market mini-panic. I am not at all sure this panic is necessary or real, though I accept that US debt dynamics are uncomfortable and that the deficit needs to be reduced. 

Consensus financial media commentary on this subject has been a little alarmist in recent months, both as a result of the forecast that [total US government debt would exceed $40trn at the end of August](https://fiscaldata.treasury.gov/datasets/debt-to-the-penny/debt-to-the-penny), and the uncomfortably high US deficit. However, long-run data on US government bond yields and their relationship with the Fed funds rate indicates that the current relationship is by no means stretched. ([Another popular myth massacre?](https://www.noisecancelling.co/read/popular-myth-massacre)) 

_Related:_ [Popular myth massacre](https://www.noisecancelling.co/read/popular-myth-massacre) — Unpacking the myths around UK gilt yields and government debt. Discover why the budget deficit has no real impact on long-term yields and what truly drives market rates. Inflation, not debt, is the key player.

Here is the data to help you make up your own mind on this issue. In summary, since 1983, the Fed funds rate has been at 3.75% on seventeen occasions, as it is now. 

The average ten-year Treasury yield during those seventeen occasions was 5.15%. Currently, ten-year Treasury yields are at 4.7%, some way below where they historically traded when the Fed funds rate was at the same level it is today.

![Where the ten-year sits when Fed funds is at 3.75%](https://r4at4qm6kmohrtvq.public.blob.vercel-storage.com/charts/chart-weekly-20aug26-fedfunds-tenyear-79b95fa8fc09-light.png)

_Every square is one month since January 1983: the Fed funds target at the month end against that month’s average ten-year yield. The dashed line is the fit through all 524 of them. At 3.75%, where we are now, it puts the ten-year at 5.1%, and the seventeen month ends the target has actually spent there averaged 5.15%. We are at 4.7%. Nine of those seventeen are months of the current hold, which began in December 2025, so the average leans on a much older inflation regime at one end and this one at the other. Even allowing for that, I cannot find the stress in it._

I am not a government bond specialist, but when I assess the long-run history of the relationship between Fed funds and Treasury yields, I cannot detect in today’s yield curve any evidence of the apparent market stress so many commentators are utterly convinced of. 

I am not saying that the US deficit is not excessive, but, equally, let’s not forget that in a world in which the two other major economic blocks in the world (China and Europe) suffer from excess saving and weak domestic demand, if the US were not consuming more than it produced, the world would be in a perma-recession. _(Neil in the margin: The 'global savings glut' argument: if surplus economies save more than they invest, someone must run a deficit and spend the difference. By accounting identity that someone has largely been the US, which is why its deficit is partly the mirror of others' thrift.)_

## A rout of epic proportions?

Just to finish off on this point, I thought it might be appropriate to show a graph of US ten-year yields over the last four years. I chose this period because it excludes the immediate post-COVID years when yields rose from all-time lows across the world during the pandemic.

![Four years of the US ten-year](https://r4at4qm6kmohrtvq.public.blob.vercel-storage.com/charts/chart-weekly-20aug26-tenyear-4y-ae0bc4a5bbd4-light.png)

_Yields bottomed at 3.97% on 27 February, the week the Iran war started, and have risen 68 basis points since. The move in the autumn of 2022, when Europe’s gas market seized up, was 122 basis points in ten weeks. Both were energy, and neither was a verdict on the American public finances._

As you can see, yields have risen over the last six months just as they did, albeit more dramatically back in 2022. The common theme here is tension in energy markets, which followed Russia’s invasion of Ukraine back in February 2022 and, of course, this year following the war in the Persian Gulf, which kicked off right at the end of February. 

Since then, yields have risen by about 70bps, but as I have pointed out, this leaves US ten-year yields below the average of periods over the last 45 years when the Fed funds rate was at 3.75%. 

_[Embedded media](https://www.telegraph.co.uk/business/2026/08/20/bond-market-rout-fails-to-dent-soaring-stock-prices/)_

Once again I find myself in a very different camp from those in the financial media consensus, like [Jeremy Warner from the Telegraph](https://www.telegraph.co.uk/business/2026/08/20/bond-market-rout-fails-to-dent-soaring-stock-prices/), who yesterday said that the US was experiencing “a bond market rout of epic proportions” in an article which also suggested that “we have entered another inflationary age”. I could not disagree more.

_The same argument, on gilts:_ [Labour shenanigans, AI mania and the gilt yield myth](https://www.noisecancelling.co/read/labour-shenanigans-ai-mania-and-the-gilt-yield-myth) — Neil Woodford argues the media's 30-year gilt yield panic doesn't stand up to scrutiny, and that Labour's leadership turmoil will matter little to the UK economy.

## The second-round effects that never came

On this theme, I also wanted to comment on the UK’s [July inflation numbers](https://www.ons.gov.uk/economy/inflationandpriceindices/bulletins/consumerpriceinflation/july2026), which were released this week. As expected, headline inflation rose from June’s 2.6% to 2.9%, reflecting the impact of July’s [13% increase in the energy price cap](https://www.ofgem.gov.uk/press-release/energy-price-cap-will-rise-13-july). 

Interestingly, core inflation was unchanged at 2.6%, and excluding energy, CPI fell from 2.5% to 2.4%, underlining the opposite of the ghostly second-round effects so often referred to by the economic intelligentsia: a material moderation in inflationary pressure across the economy.  _(Neil in the margin: The central-bank nightmare where an initial price shock — say energy — feeds into wage demands and then into broader prices, entrenching inflation. Neil's point is that with core steady and ex-energy CPI falling, this feared spiral simply hasn't materialised.)_

There was one final data point in the ONS release which I hope and expect the new shiny Chancellor of the Exchequer was paying close attention to. Given his new role as [“policeman of price gouging”](https://www.grocerygazette.co.uk/2026/08/04/analysis-healeys-profiteering-warning-risks-blaming-grocery-for-an-inflation-shock-it-cannot-control/), he would have been very encouraged to see that [food price inflation fell further in July to 1.2% (YOY)](https://www.ons.gov.uk/economy/inflationandpriceindices/timeseries/d7g8/mm23) from a heady 1.6% in June!

![Headline inflation rose. Everything underneath it fell](https://r4at4qm6kmohrtvq.public.blob.vercel-storage.com/charts/chart-weekly-20aug26-uk-cpi-a935b3af5501-light.png)

## The fastest-growing economy in the G7

Before signing off today, I thought that it might surprise those who may, unwittingly, have consumed the Jeremy Warner-style apocalyptic vision of the UK economy so loved by the economic glitterati, that the UK is the [fastest-growing G7 economy in H1 2026](https://www.resolutionfoundation.org/press-releases/economy-slows-but-doesnt-stall-as-the-uk-economy-leads-the-g7-on-growth/), whilst also having lower inflation than both the US and the EU. 

I have to say it is hardly humming, but it’s not past the U-bend either. For what it’s worth, I am convinced that after a tricky few months when inflation may pick up a bit above 3%, the outlook for later this year and 2027 is characterised by falling inflation, lower interest rates, less saving, more borrowing and spending, and an even better growth outcome.

## What to look out for next week

Briefly, it is a quiet week for UK macro data and for company results on both sides of the Atlantic. However, it is a massive week for important US macro data, which [on Wednesday includes GDP and inflation numbers](https://www.bea.gov/news/schedule). Given the heightened attention on the Treasury market in recent weeks and the alarmist tone of some commentary, it will be interesting to see how the numbers outturn against expectations and what market reaction they elicit. 

Reading between the lines, there may also be further announcements from the US Treasury Secretary, who on Thursday [said, “We are announcing at the end of this week, beginning of next week, an increased focus on fiscal consolidation”](https://www.cnbc.com/2026/08/20/bessents-efforts-in-the-treasury-market-so-far-havent-worked-heres-what-else-he-can-try.html). 

This normally means tax increases or spending cuts, neither of which will pass the political sniff test ahead of the midterm elections in November, so it will be interesting to see what Bessent means. _(Neil in the margin: The mid-term US congressional elections, held two years into a presidential term, when the whole House and a third of the Senate are up. Tax rises or spending cuts just before them are politically toxic — hence Neil's scepticism that 'fiscal consolidation' amounts to much.)_