Bond-market humiliation: Nobel-winning economist Paul Krugman says Trump administration botched its chance to put a lid on spiking bond yields
Treasury yields are still hovering near multi-decade highs with investors anxious about the Iran War and the inflation it set off. On Tuesday, the 30-year yield breached 5.59%, its highest level since the end of the dot-com bubble in 2002.
The Trump administration has sought to settle the bond market with a buyback program, to little effect. Enter Nobel-Prize winning economist Paul Krugman, who is delivering a blistering assessment of Treasury Secretary Scott Bessent and his “bond market humiliation.”
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“Bessent has now transformed himself into the Baghdad Bob of bonds,” Krugman wrote in a Substack post published Tuesday, referring to an Iraqi propaganda minister in Saddam Hussein’s regime who delivered preposterous claims in the early phase of the Iraq War.
The Treasury Department did not immediately respond to Moneywise’s request for comment.
Bessent’s impossible task at hand
Krugman reiterated his belief that yields are surging due to a combination of factors, including President Donald Trump’s latest rejection of a ceasefire proposal in the Iran War. Oil is hovering at over $100 per barrel of Brent crude. In addition, he has also blamed the explosion in AI-related spending among tech giants for driving up yields as well, given that they’re issuing a flood of corporate bonds to investors eager to snap them up.
Yields move opposite to prices, so the ongoing spike is signaling investors are demanding higher interest rates to be swayed into buying government debt.
The Treasury Department has attempted to steer the bond market into calmer waters with a buyback program to supply bond demand that will run through early November. However, Krugman argues that the initiative will do little to persuade investors that the U.S. economy’s long-term trajectory is stable.
“The truth is that Bessent might not have been able to get interest rates down even in the best of circumstances,” Krugman wrote. “But he certainly won’t get anywhere as long as Trump keeps believing that he can somehow convert his Iran debacle into a triumphant victory.”
Investors believe the Federal Reserve will step in with its second interest rate hike of the year sometime next month, an expectation that’s filtering into yields rising as well according to Krugman.
Federal Reserve Governor Michael Barr said he believes interest rates must climb higher. “Further policy adjustments are likely to be needed to ensure inflation comes down to target in a timely fashion,” Barr said in a Tuesday speech in Detroit.
