What are the key takeaways from this Odd Lots episode?

Key insights include: **Bond supply vs. demand:** The US Treasury market has grown from $18 trillion to $31 trillion, adding roughly $2 trillion annually. Foreign central banks, historically major buyers, have stopped increasing holdings. This forces domestic discretionary investors — pension funds, hedge funds, insurance companies — to absorb additional supply, and they demand higher yields as compensation for each incremental purchase.; **Treasury buyback limitations:** Secretary Bessent expanded buybacks citing liquidity concerns, but bid-offer spreads and dealer balance sheets showed no stress signals at the time. Duffie's research confirms buybacks effectively clean up illiquid off-the-run bonds clogging dealer balance sheets, but a few billion dollars lacks the firepower to meaningfully suppress long-end yields — only signaling value exists at current scale.; **Fiscal dominance boundary:** The Fed is deliberately avoiding any yield curve control arrangement with the Treasury, referencing the acrimonious 1951 Fed-Treasury Accord as a cautionary precedent. Duffie argues even the US Treasury cannot sustainably defend a yield ceiling — citing the 1992 British pound collapse, where Bessent himself participated in breaking the Bank of England's defense via the Soros fund.

What did Daryl Duffie discuss on Odd Lots?

Recorded at Jackson Hole, Stanford finance professor Daryl Duffie explains why US Treasury yields are surging past 5%, examining the $31 trillion debt market's supply-demand imbalance, Treasury buyback programs, Fed balance sheet politics, and why foreign central banks have stopped absorbing new government bond issuance. Key topics include: **Bond supply vs. demand:** The US Treasury market has grown from $18 trillion to $31 trillion, adding roughly $2 trillion annually. Foreign central banks, historically major buyers, have stopped increasing holdings. This forces domestic discretionary investors — pension funds, hedge funds, insurance companies — to absorb additional supply, and they demand higher yields as compensation for each incremental purchase.; **Treasury buyback limitations:** Secretary Bessent expanded buybacks citing liquidity concerns, but bid-offer spreads and dealer balance sheets showed no stress signals at the time. Duffie's research confirms buybacks effectively clean up illiquid off-the-run bonds clogging dealer balance sheets, but a few billion dollars lacks the firepower to meaningfully suppress long-end yields — only signaling value exists at current scale..

How long is this episode of Odd Lots?

This episode is 36 minutes long. SignalCast provides an AI-generated summary so you can get the key insights in about 3 minutes.

Odd Lots

What's Behind the Big Surge in US Government Bond Yields

September 3, 2026

36 min episode · 2 min read

Daryl Duffie

Episode

36 min

Read time

2 min

Topics

Investing, Fundraising & VC, Science & Discovery

AI-Generated Summary

Published Sep 3, 2026

Key Takeaways

✓Bond supply vs. demand: The US Treasury market has grown from $18 trillion to $31 trillion, adding roughly $2 trillion annually. Foreign central banks, historically major buyers, have stopped increasing holdings. This forces domestic discretionary investors — pension funds, hedge funds, insurance companies — to absorb additional supply, and they demand higher yields as compensation for each incremental purchase.
✓Treasury buyback limitations: Secretary Bessent expanded buybacks citing liquidity concerns, but bid-offer spreads and dealer balance sheets showed no stress signals at the time. Duffie's research confirms buybacks effectively clean up illiquid off-the-run bonds clogging dealer balance sheets, but a few billion dollars lacks the firepower to meaningfully suppress long-end yields — only signaling value exists at current scale.
✓Fiscal dominance boundary: The Fed is deliberately avoiding any yield curve control arrangement with the Treasury, referencing the acrimonious 1951 Fed-Treasury Accord as a cautionary precedent. Duffie argues even the US Treasury cannot sustainably defend a yield ceiling — citing the 1992 British pound collapse, where Bessent himself participated in breaking the Bank of England's defense via the Soros fund.
✓Fed balance sheet composition shift: Duffie predicts the Fed's balance sheet task force, led by Jeremy Stein alongside Raghu Rajan and Karen Dynan, will recommend replacing long-term Treasury holdings with T-bills rather than shrinking overall size. This would neutralize interest expense volatility: when the Fed raises rates to fight inflation, higher bill yields offset increased reserve payments dollar-for-dollar.
✓Reserves addiction ratchet: Banks will not voluntarily surrender Fed reserves because reserves satisfy liquidity regulations, earn market interest rates, and facilitate payment services simultaneously. Rajan and Acharya documented this ratchet effect at Jackson Hole 2017 — each QE cycle increases bank dependence on reserves, making balance sheet reduction operationally difficult without triggering market volatility that forces the Fed to reverse course.

What It Covers

Recorded at Jackson Hole, Stanford finance professor Daryl Duffie explains why US Treasury yields are surging past 5%, examining the $31 trillion debt market's supply-demand imbalance, Treasury buyback programs, Fed balance sheet politics, and why foreign central banks have stopped absorbing new government bond issuance.

Key Questions Answered

•Bond supply vs. demand: The US Treasury market has grown from $18 trillion to $31 trillion, adding roughly $2 trillion annually. Foreign central banks, historically major buyers, have stopped increasing holdings. This forces domestic discretionary investors — pension funds, hedge funds, insurance companies — to absorb additional supply, and they demand higher yields as compensation for each incremental purchase.
•Treasury buyback limitations: Secretary Bessent expanded buybacks citing liquidity concerns, but bid-offer spreads and dealer balance sheets showed no stress signals at the time. Duffie's research confirms buybacks effectively clean up illiquid off-the-run bonds clogging dealer balance sheets, but a few billion dollars lacks the firepower to meaningfully suppress long-end yields — only signaling value exists at current scale.
•Fiscal dominance boundary: The Fed is deliberately avoiding any yield curve control arrangement with the Treasury, referencing the acrimonious 1951 Fed-Treasury Accord as a cautionary precedent. Duffie argues even the US Treasury cannot sustainably defend a yield ceiling — citing the 1992 British pound collapse, where Bessent himself participated in breaking the Bank of England's defense via the Soros fund.
•Fed balance sheet composition shift: Duffie predicts the Fed's balance sheet task force, led by Jeremy Stein alongside Raghu Rajan and Karen Dynan, will recommend replacing long-term Treasury holdings with T-bills rather than shrinking overall size. This would neutralize interest expense volatility: when the Fed raises rates to fight inflation, higher bill yields offset increased reserve payments dollar-for-dollar.
•Reserves addiction ratchet: Banks will not voluntarily surrender Fed reserves because reserves satisfy liquidity regulations, earn market interest rates, and facilitate payment services simultaneously. Rajan and Acharya documented this ratchet effect at Jackson Hole 2017 — each QE cycle increases bank dependence on reserves, making balance sheet reduction operationally difficult without triggering market volatility that forces the Fed to reverse course.

Notable Moment

Duffie reframes the hyperscaler debt narrative entirely — it is not Amazon or Microsoft crowding out the Treasury, but the reverse. At $32 trillion and rising $2 trillion annually, US government debt dwarfs projected corporate issuance, making Washington the dominant force compressing investor capacity across all bond markets.

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Episode Transcript

00:00:03 Speaker 1: Hello, Odd Lodge listeners. I'm Joe Wiesenthal. 00:00:06 Speaker 2: And I'm Tracy Alloway. 00:00:07 Speaker 1: We're the hosts of the Odd Lodge podcast, and we've got something exciting for you. 00:00:11 Speaker 2: That's right. So one of the best parts of hosting our podcast is we get to actually meet and interact with our listeners. And we know we have some listeners over in Los Angeles. 00:00:21 Speaker 1: That's right. So if you're in L.A., we're going to be recording a live show, some live recordings at the Vermont Theater in Hollywood on September 17th. 00:00:30 Speaker 2: We have some really exciting guests lined up, have some really great conversations planned. So go ahead and get your tickets. You can find those over at Bloomberg.com forward slash oddlots or click the link below in the show notes and come and say hi when you're there. 00:00:49 Speaker 1: Bloomberg Audio Studios, podcasts, radio, news. 00:01:04 Speaker 2: Hello, and welcome to another episode of the Odd Lots podcast. I'm Tracy Allaway. 00:01:08 Speaker 3: And I'm Joe Wiesenthal. 00:01:10 Speaker 2: Well, Joe, we are still at Jackson Hole, where the official theme of this year's symposium is financial innovation in payments. However, the unofficial theme has to be what the heck is going on with bond yields and the Federal Reserve, because this whole meeting is coming against a backdrop of higher yields, particularly at the long end. a new Fed chair who seems to want to make a mark on the Fed and has started all these different task forces to look at things like comms and balance sheets. And then, of course, we also have a Fed that seems to kind of maybe be operating at cross-currents to the U.S. Treasury, given that the Treasury is now buying back longer-dated bonds and seemingly suppressing longer-dated yields. 00:01:52 Speaker 1: There's so many different dimensions to what you described, right? So there is the formal technical thing. There is the sort of relationship between... the Fed and the Treasury. There is the new things going on inside the Fed. There's obviously the warmth in the economy. By the way, the sun just came out. We're recording outside. It's been rainy and cool all day. Now it suddenly got hot again. Maybe that's a sign. 00:02:15 Speaker 3: Anyway. That's why it's fun to be in Jackson Hole, though. 00:02:18 Speaker 1: There are all kinds of different people we can talk to, including people who sit perfectly at this intersection of all the things that we're talking about. 00:02:25 Speaker 2: That's exactly what I was going to say. So the guest for today, truly the perfect guest, someone who's able to sort of synthesize the macro and what's going on in the bond market, as well as some of the operations of the actual treasury market. So truly the perfect guest. We're going to be speaking with Daryl Duffy. …

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