INSIGHTS

On August 31, 2026

AAM Viewpoints — Yields Higher, Bessent Tries Pushing Back: Next Stop for Rates and Investing

“The man doth protest too much methinks.”
— Adaptation from Hamlet

Last week Treasury Secretary Scott Bessent intervened in the bond market and was quick to say the move was to ‘improve liquidity.’ The market interpreted it differently: the action seemed aimed at curbing a bond selloff that pushed the long end of the curve to levels last touched in 2007 — and clearly to quell a potential costly move even higher with U.S. debt/GDP now over 100%. However, we believe this buyback move may have created unintended consequences. By exposing Bessent's apparent concern, the intervention brings the critical issues of high deficits, sticky inflation, and fierce capital competition from AI hyperscalers squarely front and center. Far from soothing investors, this visible anxiety signals vulnerability, and we would not be surprised if the market continues to test the resolve of both the Federal Reserve and the Treasury Department.

The Market Context & Treasury Intervention

• Bessent's Move: Treasury Secretary Bessent bought back long-end bonds to "improve liquidity."
• The Reality: The market viewed it as panic to curb a massive bond selloff pushing long yields to 2007 highs.
• The Backfire: The intervention exposed vulnerability, drawing fresh attention to massive U.S. deficits ($40T+, >100% Debt/GDP).

6 Forces Driving "Higher for Longer" Rates

• Deteriorating Deficits: Heavy government borrowing forces massive bond supply, driving yields up.
• Sticky Inflation: Strong growth, a weaker U.S. dollar & Middle East tension keep inflation high (Core Personal Consumption Expenditure (PCE just hit 3.3%).
• AI Capital Drain: Tech hyperscalers are issuing record corporate debt for data centers, competing with Treasuries.
• Fed's Missing Guidance: Chair Kevin Warsh abandoned forward guidance, injecting a steep volatility premium.
• Global Competition: Sovereign rates are rising simultaneously across Europe and Japan.
• Funding Trap: Buybacks don't eliminate supply; they just shuffle maturities, distorting the curve.

Putting current yield levels in perspective:

In the context of history (ex the low-rate regime post GFC) 10-year and 30-year rates aren't historically high — they are normalizing. Throughout the long sweep of time, the 10-year Treasury has settled in around the same level as nominal GDP. If, as we believe, inflation settles at 2.75%–3.0% and real GDP at 2%, nominal GDP sits at 4.75%–5.0%, which is exactly where the 10-year yield is hanging. This normalization can be tolerated by markets if it stabilizes. Markets have done quite fine with rates and inflation at these levels. The risk is that inflation speeds up and that is why we believe the Fed should be more communicative and follow through with a small rate increase to show their resolve. We will hear more from Chair Warsh at Jackson Hole, and the market is hoping he can add a bit more clarity to what the Fed’s reaction function will be. If not, rates could go higher, but any additional information he can offer their resolve to fight inflation should help. But the punchline in a sticky inflation environment remains: To stabilize long-term rates, the Fed needs to be willing to raise short-term rates ("one and done") to prove they are fighting inflation.

Economic Outlook

As for the economy, we remain cautiously optimistic as the counter-balancing forces remain substantial. Tax relief of $600 billion continues to move through the economy while the historic AI (artificial intelligence) investment continues to broaden through the economy. Sure, it may be difficult to figure out winners and losers over time, but there is no question the scale of investment is powering the economy, not only in chips but in construction, manufacturing, energy, cyber security, healthcare and much more. The scale of investment is one of, if not the largest, in history:

Source: Stijn Van Nieuwerburgh, Columbia Business School

The size of AI spend, and tax relief combined with low unemployment augur for continued support for the economy and earnings.

What Are We Watching?

Currently, longer duration bonds and stocks will likely continue to see bouts of volatility and potential headwinds due to rate and inflation uncertainty. During this testing period for longer-term rates, we believe in reducing exposure to long-duration benchmarks and consider moving into shorter-duration, high-quality, and inflation-hedged assets. In our view, putting some of that to work in shorter-duration credit to lock in high real yields:

• Short-Duration Fixed Income: Locking in yields while avoiding price volatility. Shorter duration investment Grade (IG) credit currently offers ~4–5% yields; High Yield (HY) sits near ~6-7% and shorter duration preferreds are also around 6%. These are quite attractive real yields even with inflation at 3% and have the potential to mitigate the rate volatility of longer-duration investments.
• Quality & Dividend Equities: We are reducing long-duration growth equities that face valuation headwinds from sticky inflation.
• Allocating to high-quality dividend payers/growers strategies and upgrade to growth quality via and add international exposure
• Thematic Diversification: Lowering exposure to a highly concentrated market.
• Allocating to durable and secular themes like aerospace and defense, energy and low correlation new economy themes to minimize overlap with the Magnificent 7. Reshoring and AI spend are leading to a renaissance in manufacturing across a broad swath of mid-small cap equities as well.
• Alternatives — Private Infrastructure: Use private markets as a diversifier, yield enhancer and macro hedge.
• Allocating to infrastructure assets, which are supported by a secular investment boom expected to be over $100 trillion over the next 25 years — certainly a sector not to be left out of inclusion in a balanced portfolio, in our view. In addition, infrastructure assets often have contractual cashflows with explicit CPI (Consumer Price Index) escalators built into long-term contracts to directly neutralize inflation.

In sum, we continue to be cautious but optimistic. We are following a playbook addressing uncertainties and opportunities this economic regime presents. Our ‘3D’ playbook is constructed for this environment — Focus on Diversification, Dividends & Income and being Deliberate in allocating to themes that have significant secular support. To echo our measured, cautious optimism we quote an adaptation of Shakespeare once again:

“Our doubts can be dubious, and make us lose the good we oft might win, by fearing to attempt”
– Measure for Measure

CRN: 2026-0803-13666 R