Tech Bond Spreads Widen, Undermining Bessent’s ‘Put’ and Pressuring Global Yields
TREE NEWS reports: Last week, credit spreads on bonds issued by major technology companies widened rapidly, with some tenors reaching cyclical highs. According to a report from Nomura Securities on August 24, this development is intensifying competition for capital with U.S. Treasuries, driving long-end yields higher and weakening the effect of Treasury Secretary Bessent’s so-called ‘put’—policy intervention aimed at capping long-term rates. Meanwhile, market concerns that the Federal Reserve is falling behind the curve continue to escalate.
What Happened: Tech Debt vs. Treasuries
The widening of tech bond spreads has spilled over into both equity and fixed-income markets. The U.S. 10-year real yield climbed to 2.40% last week, returning to levels seen before the Treasury announced increased bond buybacks. Market pricing now implies a 40% probability of a Fed rate hike in September, rising to 65% by October, while the 2-year forward OIS rate—a proxy for the terminal rate—has risen to 4.02%.
Nomura notes that the credit spread widening has not yet spread to broader credit tightening, and the relative performance of bank stocks—an early indicator of credit stress—has not shown a downtrend. However, analysts believe the situation warrants close monitoring.
Market Impact: Stocks, Bonds, and Beyond
The pressure is being felt across asset classes. In equities, tech stocks showed mixed performance: semiconductor shares fell, while hyperscale cloud and software stocks rose. Consumer-related stocks rebounded strongly, but other cyclical sectors were broadly weaker. In the bond market, the yield curve underwent a bearish flattening, with the short end leading losses on rising rate hike expectations.
For Japan, weakness in U.S. Treasuries is a direct drag, and Japanese bonds and equities are expected to face pressure early this week, according to Nomura.
Why Bessent’s ‘Put’ Is Failing
The concept of the ‘Bessent put’ refers to market expectations that Treasury Secretary Bessent would intervene to support long-end Treasury prices, thereby preventing rates from rising too quickly. Nomura argues that the competition for funds between tech bonds and Treasuries is a key reason this protection mechanism has not worked. Additionally, concerns that the Fed is behind the curve are adding to the pressure. Nomura warns that Fed Chair Warsh may be underestimating the impact of AI on growth and inflation, as well as changes in funding supply and demand, leaving fiscal and monetary policy too loose relative to actual economic conditions—at least as markets interpret it. Unless the Fed directly addresses this and signals a willingness to correct course, market concerns will persist.
Key Events This Week
Later this week, Fed Chair Warsh speaks on Friday, and his interpretation of the current rate rise will be a market focus. Meanwhile, Bank of Japan Deputy Governor Ryozo Himino is scheduled to speak on Thursday, with markets pricing an 82% probability of a September rate hike in Japan—higher than the Fed’s 40%. Nomura expects Himino to hint at a September move but is unlikely to provide detailed guidance on the subsequent path.
Key Takeaways for Investors
- Monitor credit spreads: Widening tech bond spreads can signal stress that may eventually affect broader credit markets and equities.
- Watch central bank signals: Fed and BOJ communications this week will be crucial for rate expectations and yield movements.
- Diversify across sectors: The tech debt vs. Treasury dynamic highlights the importance of sector and asset class diversification.
- Stay alert to global spillovers: U.S. Treasury weakness is likely to impact Japanese and other global markets.
