In times of uncertainty and flux, clarity and surefootedness from policymakers are essential

Yawning spreads and falling valuations herald pain for sponsors with over-leveraged portfolio companies, especially those stuck in software purgatory. Even paper from strong corporate issuers is beginning to reflect the turmoil. Earlier this month, the investment grade yield-to-worst index hit 5.56% — a more than two-year high.

Little did we know, when Bessent kicked off his run of activism by supporting the Japanese yen, that he would follow up in mid-August with a significantly boosted long-dated Treasury buyback plan. Both efforts sought to flatten the yield curve.

Designed to show strength, it signalled frailty. Wall Street smelled blood in the water. The yield on 30-year Treasuries remains stubbornly close to 5.25%, at the top of its 52-week range. Bessent’s financial engineering saw the dollar fall, the US Dollar Index notching down to compensate.

This was inevitable. If you run a deficit heading towards 7% of GDP and sovereign yields rise, buying long-dated paper may deliver temporary yield relief — until the market whack-a-mole pops up elsewhere.

He’s right to focus on fiscal consolidation as the necessary counter to make any Treasuries buyback intervention a success. Credible tightening might obviate the necessity for buybacks at all.

But good luck with that ahead of the midterms.

With Bessent’s market communication poor, his approach to government borrowing panicky and his pledges on fiscal restraint unrealistic, his ability to support Fed chair Kevin Warsh in taming inflation has been neutered.

Which increases pressure on the Fed to raise rates this month — and for Warsh to abandon his distaste for forward guidance. Inflation expectations will lose their moorings if both Treasury secretary and Fed chair are considered incompetent or gnomic.

Could AI yet rescue Bessent and Warsh? Significant productivity gains from new technology could ease pricing pressure and reduce labour’s bargaining power. There is scope for monkey paw-style outcomes here.

Goldman Sachs projects the USD 765bn in AI capex expected this year to balloon to USD 1.6tn by 2031. This will undoubtedly be inflationary over the period, even if the underlying technology lives up to billing by turbocharging productivity.

The question is how solid that capex projection turns out to be.

Cut-price open-source models from China, including DeepSeek, Qwen and Kimi, alongside Facebook parent Meta’s Muse and Llama Series, sit alongside Google opening an AI subscriptions price war. Which weighs on Anthropic’s touted USD 2tn IPO valuation.

And there’s a world where this is just the tip of the iceberg.

And so AI model giants “are wasting hundreds of billions of dollars in investments”, notes Panmure Gordon analyst Joachim Klement.

Hyperscalers are rushing to build Ferrari factories when it seems that the customer would settle for a Nissan Versa.

So if cooling in the AI market does temper inflation, it could be at the cost of a significant correction in the private credit markets financing data centre roll-out — and a wider curtailment of animal spirits.

Despite briefing that he wasn’t fully on board with President Trump’s tariffs agenda, Bessent’s Trump-coded public persona spans trade policy and subjects most predecessors would have swerved — a far cry from the market orthodoxy of the likes of Tim Geithner or James Baker.

In times of bullish enthusiasm, tech uncertainty and geopolitical flux, clarity and surefootedness from policymakers are essential.

Both are sadly lacking.

Corporates, sponsors and lenders considering their financing and footprint options would do well to ensure they’ve truly modelled adverse scenarios before putting capital to work – or they risk looking every bit as clumsy as Bessent.