As mentioned here on Monday morning, and as discussed at greater length earlier this month in “Long Bond, Big News,” the entirety of the increase in 30-year US yields since “Liberation Day” is attributable to reals. Breakevens are unchanged over the period.

There are two possible explanations, and they’re not mutually exclusive. As SocGen noted first thing this week, higher real rates “can reflect good news, such as stronger growth expectations [or] bad news, such as fiscal risk and policy uncertainty.”

At present, the long bond’s reflecting both. There’s no question that markets are concerned about America’s fiscal trajectory. Or perhaps it’s more accurate to say price-sensitive investors understand that in the absence of a perpetual bid from the Fed and, at the margins, less demand from other price-insensitive investors aggrieved at the Trump administration’s tariffs and foreign policy, their capital’s in short supply and they can demand higher compensation on the excuse they’re worried about America’s finances.

At the same time, r-star, to the extent you can countenance the neutral debate, is almost surely higher in the post-pandemic macro environment, and it seems just as likely as not that AI will push it higher still. At the same time, nominal growth’s stuck at a Spinal Tap-ish “11” in an era of fiscal dominance.

If you ask Morgan Stanley’s Mike Wilson, the rise in yields is more a function of the growth environment than it is fiscal worries. “We have a different view here than the mainstream,” Wilson wrote on Monday. “While many are running with the story that rates are on the rise due to inflation fears and/or the persistent fiscal deficits alongside historically elevated debt/GDP, our take is that rates are rising mainly due to the very strong nominal GDP growth since COVID.”

As a quick aside (and to reiterate): Those explanations aren’t mutually exclusive. And I’d also point out that although rates strategists have puzzled over rangebound breakevens given elevated inflation and the perception (since the July FOMC) that the Warsh Fed might lack credibility, being rates strategists, they aren’t confused about the breakdown of the yield rise.

The figure below, from Wilson, is simple. It plots benchmark US yields with nominal US GDP.

“Much of [the] rise in nominal GDP is due to the aggressive fiscal policy since the pandemic, an era of fiscal dominance, much like the post-WWII era,” Wilson wrote, adding that Treasury and the Fed “have no choice but to find a way to fund the deficits.”

That, he went on, is the context for Scott Bessent’s upsized buybacks and the implicit twist dynamics: Treasury can’t conjure reserves, so in order to buy back longer-tenor US notes and bonds, Bessent has to issue more T-bills.

As Wilson pointed out, the increase in short-end issuance isn’t new. “Treasury has been funding more of the deficit at the front-end since 2020, effectively using the excess reserves in the banking system first created by direct injections of liquidity by the Fed during COVID and post-SVB, in addition to the de-regulation of the banking system last year” to absorb new Bill supply.

Now, with those reservoirs more or less tapped, Treasury and the Fed will likely be compelled to “intervene as necessary to maintain stability,” as Wilson put it, calling Bessent’s activist inclinations  “par for the course for those paying attention to what [officials] have been doing over the past 20 years.” He cited QE, of course, but also the reverse repo facility, RMPs, Treasury buybacks and the Trump administration’s deregulation push.

So, nothing to see here? Maybe not, according to Wilson. Or nothing that hasn’t been seen before “in one form or the other,” as he put it. Rather, Bessent’s interventions in the FX and bond markets “were attempts to stabilize financial conditions so that markets could continue to operate and maybe even entice some buying of Treasurys under the assumption the Treasury will do whatever it takes.”

This doesn’t, in Wilson’s view, necessarily presage QE or yield-curve control, even as “gold and crypto markets have taken notice” on the off chance the upsized buybacks are just “the first step to a larger intervention.”