Newsletter · 2026-08-25 · Ashutosh Agarwal

The Bond Market Round Trips the Treasury Buyback as Warsh Speaks Friday - The Dollar Brief - Week of August 25, 2026

The Dollar Brief for the week of August 25, 2026. Podcast synthesis on how the bond market fully round-tripped Scott Bessent's expanded Treasury buyback, why the real fragility sits in Treasury-market plumbing, and what Kevin Warsh's Friday Jackson Hole debut could trigger.

The Dollar Brief

Week of August 25, 2026: The Bond Market Round Trips the Treasury Buyback as Warsh Speaks Friday

Last week the Treasury tried to talk the bond market down. This week the market handed the phone back. The 10-year Treasury interest rate is sitting almost exactly where it was the minute before Scott Bessent announced he'd double the government's bond buybacks, the whole move round-tripped. So the drama now moves to one room in Wyoming on Friday, where the new Fed chair, Kevin Warsh, gives his first big speech.

But the more useful conversations this week weren't about the headline. They were about what sits underneath it: the pipes of the Treasury market, which fewer people understand than you'd hope; the real, measurable state of the world backing away from the dollar; and whether the dollar's recent slide is the start of something or just late-August noise. A couple of heavyweight, less-shouty voices showed up to answer those, and, refreshingly, a sitting Fed official basically shrugged at the whole thing.

Let's walk through it.

(Quick vocabulary, used throughout. A bond's "yield" is just the interest rate it pays; bond prices and yields move in opposite directions, so when investors sell bonds, prices fall and yields rise. The "DXY," or dollar index, measures the dollar against a basket of other big currencies. A "buyback" is the Treasury buying back its own older bonds. An "off-the-run" bond is an older, less-traded government bond; the newest, most-traded one is "on-the-run." A "basis trade" is a leveraged bet on the tiny price gap between a bond and its futures contract. "Repo" is short-term borrowing where you post bonds as collateral. "Yield curve control," or YCC, is a central bank pinning an interest rate at a chosen level and printing money to defend it.)

TL;DR

The bond market fully round-tripped Bessent's move. The 10-year is back at ~4.71%, versus 4.70% just before the announcement, "we've round-tripped the entire thing," as the hosts put it, so the market is effectively saying "you called? Fine. I raise" (The Financial Exchange Show, Aug 21).
The most valuable read of the week was about plumbing, not politics. Ex–hedge fund CIO Mark Rzepczynski explained that hedge funds are now the marginal buyers of long-dated Treasuries, via hugely leveraged "basis trades" financed in the overnight repo market, so "whatever happens to the repo market is going to spill over to the bond market in ways that we're not really sure of" (Top Traders Unplugged, Aug 22).
A sitting Fed president refused to be rattled. San Francisco Fed chief Mary Daly called the long-end sell-off "a global phenomenon" that "doesn't give us a lot of signal," said "I don't see our credibility at risk," and drew a hard line on the Treasury's meddling: "it's the Treasury Secretary's job, not the Federal Reserve's job" (Bloomberg Talks, Aug 20).
A contrarian take: the buyback actually helps the Fed's independence. Fund manager Axel Merk argued that doing this at the Treasury, not the Fed, "gives Kevin Walsh a little bit more space to work on the reforms that he has in mind", while noting Bessent is swapping 1%-coupon bonds bought "at 50 cents on the dollar" for short-term debt "that currently yields 3 and 3 quarters percent" (Mining Stock Daily, Aug 21).
Veteran short-seller Bill Fleckenstein: it's a "yawner" now, but YCC comes later. He called the move "a signaling move" and "kind of a non-event," predicted the Fed will "pursue yield curve control" down the road, and dismissed the AI borrowing wave in three words: "That AI paper is garbage" (Thoughtful Money, Aug 23).
The dollar bears got a sober counterweight. Economist Lacy Hunt: "The near-term direction of the dollar might be lower, but… ultimately these will be episodes that will follow that will bring the dollar back. There's really no one to lead the global economy today" (Thoughtful Money, Aug 22).
The de-dollarization debate got an actual referee. Reserve-currency historian Barry Eichengreen sees real erosion, the dollar's share of global reserves is down "from more than 70 percent at the turn of the century to less than 60 percent now", but says the money is drifting to Canada, Australia, Korea and Sweden, not China, whose currency is still under 2% of reserves. His self-aware punchline on his own long-standing call: "I'll keep predicting it until I'm right" (The Capitalism and Freedom Podcast, Aug 20).
And a blunt skeptic on the other side. On Unf*cking The Republic (Aug 23), the host called the idea of losing reserve status "the single stupidest thing that we could do," because replacing the dollar is "decades" of structural change and "there's nobody else that can do it."
Nuance worth holding onto: foreigners aren't fleeing America, they're fleeing American bonds. Lacy Hunt noted foreign equity investment rose "almost a trillion dollars" in twelve months, even as Treasury buying "is dwindling down" (Thoughtful Money, Aug 22).
Friday is binary. If Warsh repeats his tight-lipped July act, "this move in yields is not over"; if he explains how he sees the Fed's role, expect relief (The Financial Exchange Show, Aug 21).

What's new

The market called the bluff, and the pros started asking "why now?"

Here's the scoreboard, five days on. Bessent announced he'd roughly double the Treasury's buybacks of long-dated bonds (paying for it with more short-term Treasury bills), hoping to nudge long-term interest rates down. The 30-year briefly dropped. Then it all came back.

The cleanest tally came from The Financial Exchange Show (Aug 21). Host Chuck Zodda: "U.S. ten-year Treasury is at 4.71%. Just prior to the Treasury making that buyback announcement, U.S. ten-year Treasury was at 4.7%. So, effectively, there's been no change. We've round-tripped the entire thing." His framing of the standoff is the line of the week: the market is telling Bessent, "you called? Fine. I raise. Back in your court. What are you going to do?"

And that raises the question the pros kept circling: if the move didn't work, why do it now? Zodda's own answer cut to the real discomfort, it's the split-screen between the Treasury and the Fed. Warsh, three months into the job, has said he won't "spoon-feed" markets; he wants markets to interpret data and do some of the Fed's work. Bessent, meanwhile, is elbowing into the market to force rates down. As Zodda put it, they're "two different institutions that answer to different people on different timelines about different things… clearly not seeing them singing from the same sheet of music." His read on what the action really signals: "Besant, through this action this week, is pretty much saying, guys, something's not working for me when it comes to paying the bills."

The plumbing under the market, the part almost nobody explains

This was the most genuinely educational conversation of the week, and it came from a systematic investor and former hedge-fund CIO, Mark Rzepczynski, on Top Traders Unplugged (Aug 22). Strip out the politics and here's what the buyback is really about.

The Treasury market has quietly gotten too big for the people who are supposed to grease it. During its regular refinancing, Rzepczynski noted, the government can auction "close to $800 billion in a given week, which is [an] astounding number." Trouble is, the middlemen, the "primary dealers," the banks designated to make markets in Treasuries, don't have the balance sheet to keep up. Because of post-2008 capital rules, "there may not be enough capital at primary government security dealers for them to do their job to make markets." So when someone wants to sell an older, less-traded "off-the-run" bond, there isn't always a buyer, and prices for those bonds drift out of line. That, he argued, is what the buyback is really addressing: "there isn't enough market-making power to be able to ensure that these off-the-run bonds have enough liquidity. And that's where the real problem is." Crucially, and this is the point that separates panic from reality, "This is from the Treasury. This is not from the Fed." (His skeptic's aside on the suspicious timing, a day after the 30-year hit ~5.34%: "if the government tells you not to worry, that's the time to start to worry.")

Now the scary part. Who actually buys the long end these days? Increasingly, hedge funds. "The vigilantes are the hedge funds," Rzepczynski said, but "a different type of vigilante… levered accounts." They now hold "9% plus of the total… marketable Treasury bonds," and their number-one trade is the "basis trade": a bet on the sliver of price difference between a bond and its futures contract. Because that gap is tiny, "the only way you're going to make any money at the basis trade is that you've got to use a tremendous amount of leverage on what you think is a fairly low risk, low return trade that you lever up like crazy", financed in the overnight repo market. His warning: "whatever happens to the repo market is going to spill over to the bond market in ways that we're not really sure of." He reached for the 2015 Swiss-franc blow-up as the cautionary tale, a "certain" trade until the day it wasn't, and flagged the echo of March 2020, when Treasury liquidity briefly vanished.

Bank analyst Chris Whalen filled in the other half of the pipe on The Julia La Roche Show (Aug 22). His useful insight: the Treasury has its own version of money-printing, aimed at the short end. Because it funds itself "six, seven, eight hundred billion dollars at a time" in T-bills and parks huge cash balances at the Fed, it can push short-term rates down simply by lending that cash back out through repo. "That's how they would engage in their own version of quantitative easing… in a short-term sense, not the same way as the Fed was doing it." On the math that actually matters for the deficit, he was blunt: a 5% ten-year yield is bad news, because "as these securities roll off, especially the securities that they issued during COVID, the coupons on the replacements are going to be higher. So the deficit is going to increase." And he took a flamethrower to the last decade of Fed balance-sheet management, the idea that the Fed could "control the long end of the market by mucking around the Fed balance sheet… was crazy. It made no sense at all."

A Fed president refuses to blink

Amid all the market melodrama and "Fed-versus-Treasury" headlines, it was worth hearing directly from someone inside the building. San Francisco Fed President Mary Daly sat down with Bloomberg on Bloomberg Talks (Aug 20), and she declined, politely and repeatedly, to panic.

On the surging long end: "it is typically driven by structural factors like fiscal sustainability, geopolitical rebalancing, the massive AI investment… The thing that I look at specifically is this is happening across the globe. It's not just a U.S. phenomenon… And it doesn't give us a lot of signal about what we should do."

On the fashionable idea that a jittery market is doing the Fed's tightening for it: "I always hesitate to say that the market's doing our work. But… it begs the question, what problem are we trying to solve by adjusting policy preemptively? You know, there's a lot of discussion about our credibility. There, I don't see our credibility at risk." She said the market "seem[s] to be signaling to us that they understand our reaction function," and that inflation expectations show no "worrisome swings."

And when Bloomberg's Jonathan Ferro pushed, isn't it a problem that the Treasury is openly trying to manage yields?, Daly drew the constitutional line cleanly: "it's the Treasury Secretary's job, not the Federal Reserve's job. And we have our own job… the Federal Reserve cares about its independence and its credibility and sticks to its remit." She backed the Fed's July hold and laid out her two scenarios: her base case, that a series of one-off shocks (tariffs, oil, the AI investment boom) "roll up… roll down… roll through" and inflation drifts back to target; versus the risk that overlapping shocks "compound" into a real inflation problem needing tighter policy, which, she said, "I haven't seen… yet."

That is the sound of a central bank that does not feel cornered, a useful reality check against the "the Fed will be forced to act" chorus.

Is the buyback clever or just theater? Two fund managers, two answers

The generous read came from Axel Merk on Mining Stock Daily (Aug 21), and it's a genuinely fresh angle: the buyback might quietly serve the Fed's independence. His logic is that a program like this is inherently a political choice, "and the place to do this sort of stuff is at the Treasury Department. It's a political choice with political accountability… one of the unintended consequences is that the focus is on Treasury rather than the Fed. And that gives Kevin Walsh a little bit more space to work on the reforms that he has in mind." In other words, by absorbing the political heat himself, Bessent lets Warsh keep the Fed above the fray.

Merk was clear-eyed about the mechanics, though. Bessent is "buying back bonds with 1% interest rates at 50 cents on the dollar and replacing them with short-term debt that currently yields 3 and 3 quarters percent", which, over time, raises the government's borrowing bill and turns the national debt into "an adjustable-rate mortgage, which isn't so great." His verdict: "We are patching up a system rather than fixing the root causes," and, invoking "Ferguson's law", when a country spends more on interest than on defense, it's in trouble, "the biggest national security risk is deficits." Why should a normal person care? Mortgage rates, mostly: with rates back to historically normal levels after a 20-year stretch of unusually cheap money, homeowners are "stuck," which "reduces mobility of the labor force."

The cynical read came from veteran short-seller Bill Fleckenstein on Thoughtful Money (Aug 23). To him the move is "kind of a non-event… a signaling move," which "helped the long bond move up a point… a yawner." The bigger picture, in his telling, is that the bond market is slowly wresting control from policymakers, he noted the Fed has cut rates 175 basis points over two years, yet yields from two to five years out are higher, "an indication that the bond market is uncomfortable with these policies." His prediction: when things get dicey, "the Fed will pursue yield curve control." And on the AI-borrowing wave that's crowding into the same bond market, he was withering: "That AI paper is not high-quality debt. That AI paper is garbage… I wouldn't touch any of that debt with a 10-foot pole," comparing today's blue-chip confidence to the pre-crisis faith in GE, Lehman and Washington Mutual.

The dollar: a real slide, or just noise?

The recent read leaned into the "new weak-dollar regime" momentum. This week brought the counterweight, from people who are structurally cautious on the dollar but think the funeral is premature.

The most measured came from economist Lacy Hunt on Thoughtful Money (Aug 22). Asked directly where the dollar goes: "I suspect that the dollar is going to have increasing problems, but I think that the rest of the world is also going to have increasing problems… The near-term direction of the dollar might be lower, but… ultimately these will be episodes that will follow that will bring the dollar back. There's really no one to lead the global economy today." (Also on the panel was Brent Johnson, the investor best known for the "dollar milkshake" thesis that a stressed world ends up needing dollars, a reminder that the structural bull case has not gone away.) Fleckenstein put the same idea more bluntly: "the other currencies are so bad, the US dollar being the best currency, that's not going to change… We're not going to lose reserve currency status, but that doesn't mean people want to own long-term treasuries."

Underneath the dollar story is the yen. Systematic investor Rzepczynski flagged that the recent yen rescue involved not just Japan's Ministry of Finance but the Fed itself joining in, and his flat professional verdict: "intervention usually doesn't work in the foreign exchange markets… it tells you that someone doesn't like the… direction of the markets." That squares with the deeper dive on Many Happy Returns (Aug 19), which walked through the U.S.–Japan coordinated defense that dragged the yen from around 164 back toward 157 per dollar, and noted purchasing-power models still peg the yen as 12–40% undervalued, a lot of rope for it to weaken again once the official hands come off. Merk added the clever bit of the plumbing: Bessent signaled a bigger dollar-yen swap line so Japan wouldn't have to sell U.S. Treasuries to raise the dollars it needs to defend the yen, a way of telling speculators to "use less leverage." Notably, on that Fed cooperation, "you haven't heard a beep from the Fed."

De-dollarization, this time with a referee

The "world is dumping the dollar" theme usually gets narrated by gold enthusiasts. This week it got a proper historian and a proper skeptic, which makes the debate far more useful.

The measured case for erosion came from Barry Eichengreen, arguably the leading scholar of reserve currencies, on The Capitalism and Freedom Podcast (Aug 20). He sees "more evidence… of the erosion of dollar dominance" than his (skeptical) host: the dollar's share of global reserves is down "from more than 70 percent at the turn of the century to less than 60 percent now"; foreigners are "increasingly reluctant to hold U.S. treasuries"; and the "convenience yield", the discount at which the U.S. gets to borrow simply because everyone wants dollars, "seems to be evaporating as well."

But his two twists are what make him worth quoting. First, the money leaving the dollar isn't going where everyone assumes: "most of the movement away from the dollar has not been toward the euro and the RMB, but toward non-traditional reserve currencies", Canada, Australia, New Zealand, Korea, Singapore, Sweden, Norway, small, well-run economies whose currencies are now easy to trade electronically. China's renminbi is still "less than 2% of global FX reserves." Second, he tied reserve status to politics, not just economics: currencies stay dominant when the issuer has rule of law, checks and balances, and reliable security alliances, and he worried aloud that scaling back joint military exercises with South Korea "will blunt the incentive for the Bank of Korea… to hold a disproportionate share of their reserves in dollars." His disarming caveat about his own long-running forecast: "I've been predicting a movement toward a more multipolar international monetary system for a long time. And I'll keep predicting it until I'm right."

The blunt rebuttal came from Unf*cking The Republic (Aug 23), reacting to a resurfaced clip of Vice President JD Vance musing that the dollar maybe shouldn't be the reserve currency. The host's response was unprintable in full but unambiguous: dislodging the dollar would be "the single stupidest thing that we could do," because "the amount of structural change that would have to happen in the international banking settlement and regulatory system… is decades," and, bottom line, "there's nobody else that can do it." He'd concede the petrodollar (oil priced in dollars) could fade in 10–15 years, but not the dollar's core reserve role. He also connected the dots the plumbing crowd made: as AI giants like Amazon issue 30-year debt at 5.5–6%, and Japanese yields climb, global investors quietly reallocate a slice away from 100% U.S. government exposure, which "reduces the demand and increases the risk premium for U.S. debt."

The one nuance both sides should sit with, from Lacy Hunt: the retreat is specifically from U.S. bonds, not U.S. assets. Foreign equity investment rose "almost a trillion dollars… in just 12 months alone," even as Treasury buying "is dwindling down and coming off quite significantly because… foreign investors… don't want anything to do with fixed income and they just want to take advantage of the stock market."

The louder, gold-standard-flavored version of all this is still out there, Matthew Piepenburg claiming central banks now hold more gold than Treasuries, with China having stacked 14,000 tons since 2015 across "20 straight months of net buying" (ITM Trading, Aug 21), and Alasdair Macleod claiming the People's Bank of China told domestic banks back in February to trim their Treasury holdings (The Flying Frisby, Aug 23). (Both are long-standing gold advocates building a dramatic narrative, treat the specific figures as their claims, not confirmed reserve data. Eichengreen's slow-erosion framing is the more grounded version of the same trend.)

Friday: what to actually watch

Normally Jackson Hole is about the next rate move. This year, the desks agree, it's about whether Warsh explains himself at all.

The Financial Exchange Show (Aug 21) framed Friday as close to binary. "If we get a repeat of the July 29th performance, then this move in yields is not over," Zodda said, that press conference "left pretty much every financial expert in complete confusion about how Walsh thinks." The alternative is that Warsh provides "sufficient clarity, not on like what he's going to do, but just on his overall view of… the role that [the Fed] is going to play in conjunction with the Treasury." His memorable way of putting the choice: "is it the pizza that's the problem, or is it the box? Like, is what you're trying to do the issue, or did you just… package it wrong?" And every Fed chair, he noted, gets tested; the market signals right now, yields, gold, are "kind of screaming, hey, you're about to do something you shouldn't."

Lacy Hunt sharpened the stakes for Warsh personally: he needs to "establish his bona fides… Words are not enough. They have to be confirmed by action… the clock is ticking." Worth noting a dissent from the "Warsh is a hawk" consensus, crypto researcher Markus Thielen argued Warsh has actually "been more dovish in practice" than his hawkish reputation, and expects no hikes (Markets Outlook, Aug 20), a pundit's read, but a reminder that Friday could surprise doves as easily as hawks.

The debate

Did the buyback matter? As a fix, no. As an X-ray, yes. Everyone from the buy-side (Merk, Fleckenstein) to the plumbing experts (Rzepczynski) agrees the dollar amounts are trivial and the yields round-tripped. But it revealed two things worth more than the move itself: that the Treasury market has a real liquidity/market-making problem beneath the surface (Rzepczynski), and that the administration has "no tolerance for higher rates." The optimistic spin (Merk) is that keeping this at Treasury protects the Fed's independence; the pessimistic spin (Fleckenstein) is that it's the first step toward eventual yield curve control.

Is the Fed actually cornered? Not according to the Fed. The market narrative says a jumpy bond market and a meddling Treasury will force Warsh's hand. Mary Daly, an actual voter on rates, pushed back on all of it: the long-end move is global and structural, credibility is intact, and there's no urgent problem to "solve" preemptively. The counter-argument (Fleckenstein, the bond bears) is that the market, not the Fed, ultimately sets the long end, and it's telling the Fed it's uncomfortable. Friday is where these two worldviews collide.

Is de-dollarization real? Real, slow, and widely exaggerated. The grounded case (Eichengreen) is measurable erosion, reserves from 70%+ to under 60%, a shrinking convenience yield, but a drift toward small well-run currencies, not a coronation of the renminbi. The skeptic's case (Unf*cking The Republic) is that there is simply no structural alternative for "decades." The gold camp's case (Piepenburg, Macleod) is the dramatic version, long on narrative and light on confirmable data. The synthesis that fits the facts: the world is cooling on U.S. bonds, not U.S. stocks (Lacy Hunt).

The trades in play

Where podcasts named actual expressions this week (all are speakers' own positioning, not advice):

Trend-following into the fall. Rzepczynski, a systematic (CTA) investor, argued the sheer ambiguity, Fed direction, Treasury meddling, currency intervention, "is going to lead to trends," calling it "a lot of opportunity for trends going forward in the fall." He noted CTA benchmarks were up roughly 9–10% on the year (Top Traders Unplugged).
Hard assets over long bonds. The through-line of Lacy Hunt (precious metals and hard assets do well in a "prolonged inflationary era"; bearish bonds), Fleckenstein (bond market wresting the printing press away), and the gold crowd (Merk's audience, Piepenburg) (Thoughtful Money; Thoughtful Money; Mining Stock Daily).
Avoid AI corporate paper. Fleckenstein wouldn't touch it "with a 10-foot pole," on the view it's crowding the same bond market and isn't the quality the ratings imply (Thoughtful Money).

Read-throughs

The real fragility is in the pipes, not the politics. If you want to know whether this gets dangerous, watch repo-market stress and Treasury-auction quality (bid-to-cover ratios, auction "tails"), not the buyback headlines. The long end now leans on leveraged hedge funds financed overnight; a repo hiccup is the transmission mechanism to a disorderly bond move (Rzepczynski; The Financial Exchange).
A Fed that won't be rushed is itself a market signal. Daly's calm suggests the September base case remains a hold, not a rescue. Hike odds had already faded from above 60% a week earlier toward a hold, absent a hot August inflation print (Mind the Macro, Aug 21). If Daly's "no urgency" is the median view, don't expect Warsh to hand the bond market a gift on Friday.
"Foreigners are leaving" is half-true, and the half that's false matters. They're backing away from Treasuries while pouring into U.S. equities (Lacy Hunt). That supports the dollar more than the de-dollarization headlines imply, and it means the pressure shows up in yields and the term premium, not necessarily in a dollar collapse.
The deficit is still the only real lever, and still untouched. Merk, Whalen and Eichengreen converge here: buybacks, bill shifts and yen swap lines are patches. Until Washington addresses the deficit, the structural upward pull on long yields, and the slow erosion of the borrowing advantage, persists.

What changed this week

The buyback fully round-tripped. The one-day rally in long bonds reversed completely; the 10-year is back where it started, handing the "it's just signaling" camp the scoreboard.
The conversation moved from politics to plumbing. The freshest, most substantive analysis this week was about why the long end is fragile, under-capitalized dealers and leveraged, repo-financed hedge funds as the marginal buyer, not about the Warsh-versus-Bessent personality clash.
A sitting Fed official publicly downplayed the drama. Mary Daly's "I don't see our credibility at risk" and "it's the Treasury Secretary's job, not the Federal Reserve's" is the clearest in-house pushback yet against the "Fed is cornered" narrative.
The de-dollarization debate got grounded. An academic referee (Eichengreen) reframed it as real-but-slow erosion toward small currencies, not a euro/renminbi takeover, while a skeptic argued there's simply no alternative for decades.
The Clarity Act's odds ticked up. One crypto show cited passage odds near 53% following an ethics-provision settlement (CRYPTO 101, Aug 22), a notable improvement from the roughly one-in-five prediction-market odds cited a few days earlier, though still far from a done deal.

Levels referenced are approximate, from mid-to-late-August U.S. sessions: the 10-year Treasury yield having round-tripped to ~4.71% (vs ~4.70% just before the buyback announcement); the 30-year having touched ~5.34% (a roughly two-decade high) before easing toward ~5.26%; the dollar index near a three-month low around 100; dollar-yen dragged from ~164 back toward ~157 on coordinated U.S.–Japan intervention, with purchasing-power models still flagging the yen as materially undervalued; the Treasury buyback set to at least double to ~$4bn/operation from Sept 9, financed with bills; hedge funds now holding ~9%+ of marketable Treasuries. Key dates ahead: Warsh's Jackson Hole speech Fri Aug 28, the Clarity Act Senate vote around Sept 15, the Sept 16–17 FOMC, and the Nov 3 midterms.