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The Treasury Twist
The Iran war is turning into an economic problem. Wars have a way of finding their way into oil, shipping, groceries, and eventually the bond market. They are very democratic that way!
Renewed U.S.–Iran strikes pushed Brent crude up 2.7% on August 31 to $90.49 a barrel. Inflation worries followed, and the 10-year Treasury yield touched 4.768%, its highest level since January 2025. Fed funds futures moved to a 65% probability of a September rate hike, up from 35% before Chair Warsh’s Jackson Hole remarks three days earlier.
That is bad news for Trump heading into the midterms. Higher oil leads to higher gas prices and higher inflation. Higher inflation makes rate cuts less likely. Higher long-term rates flow through to mortgages, auto loans, credit cards, and commercial real-estate debt.
The political pressure is obvious. A UMass poll found that 68% of respondents disapproved of the administration’s handling of the Iran war, while 80% said the conflict had increased food and gas costs. No White House would call high long-term rates a winning strategy.
Enter the Treasury Twist.
On August 19, Treasury announced that it would at least double buyback operations for longer-dated securities, from $2 billion to at least $4 billion per operation, targeting the 10- to 20-year and 20- to 30-year bonds. Treasury calls it liquidity support. The reaction was favorable: the 10-year yield fell 5.7 basis points and the 30-year fell 9 basis points.
Then the market reconsidered. By August 31, the 10-year was back above 4.75%. The purchases have not begun, so it is too early to judge. But the announcement did not create the lower-rate equilibrium Washington wants. Bond investors appear unwilling to let a $4 billion buyback operation settle questions about oil, inflation, deficits, and Treasury supply.
This is not QE. Under QE, the Federal Reserve creates new bank reserves to buy bonds, expanding its balance sheet. Treasury is doing something different: buying back some older, long-term government bonds without creating new money. Think of it as refinancing part of a long-term mortgage. The debt does not disappear, but the market has fewer long-term bonds to absorb. Treasury cannot set the Fed’s policy rate or erase inflation. But by becoming a larger buyer of long-term bonds, it can try to support bond prices and reduce pressure on long-term yields.
If oil stays elevated and rates rise, expect pressure for intervention: larger buybacks, more attention to the issuance mix, and more public discussion about “liquidity.” That may calm markets, but it cannot make energy cheaper, remove inflation pressure, or control bond-market behavior.
For real estate, higher for longer is not inevitable. But it is certainly becoming the base case until the bond market says otherwise.
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