Bessent's Yield Suppression Efforts Fuel Debasement Trade

The US and Iran's escalating conflict has led to higher oil prices, but surprisingly, this hasn't sparked rate hike speculation as markets had expected. Instead, a recent 10-year Treasury bond auction showed strong demand for long-term US debt, suggesting that Treasury Secretary Scott Bessent is winning his battle to keep borrowing costs in check.

The 'war trade' logic, which links oil prices to inflation expectations and Fed rate hike speculation, appears broken. Despite crude oil hitting its highest level since May, the probability of at least one rate hike before year-end remains unchanged at 87%. This has led some traders to question whether Bessent's yield suppression efforts are effective.

A strong demand for long-term US debt is evident in the recent auction, where yields jumped to a 19-year high. The Treasury Secretary's efforts have been focused on buying back stale long-term securities, and it seems that markets are responding positively. This has implications for the 'debasement trade', which is fueled by expectations of inflation and currency devaluation.

Now, all eyes are on upcoming inflation data and a 30-year bond auction, which may amplify the 'yield suppression' trade further. If traders shrug off target-busting price growth, it will reinforce the message that Bessent gets to have his way for now, fueling debasement trade dynamics.