The Trump administration is fighting a two-front war: an increasingly aggressive Iran and a bond market that is demanding higher yields.
Treasury Secretary Scott Bessent is being asked to tackle both with the same weapon: America’s financial power.
The strategy is straightforward. Force Iran to fully reopen the Strait of Hormuz, bring oil prices down, ease inflation expectations and take pressure off the Treasury market. The problem? Iran appears determined to hold onto the strait.
On Monday, Bessent laid out what he called an “economic D-Day” against Iran, warning countries that continue doing business with Tehran that they could face the same isolation.
The Treasury Department plans to expand secondary sanctions against entities and countries dealing with Iran. Bessent also warned that nations helping the regime could be cut off from the dollar-based financial system.
That puts a particularly large target on Chinese companies, which remain major buyers of Iranian oil and facilitate Iran-linked financial transactions.
That could make President Donald Trump’s planned September summit with Chinese President Xi Jinping even more complicated, just as Washington and Beijing are trying to prevent another escalation in trade tensions.
The United Arab Emirates, another key financial gateway for Iran, has already announced an embargo on trade and transactions with the Islamic Republic.
Meanwhile, Iran’s economy is coming under severe pressure from the U.S. naval blockade, which has hammered the country’s oil exports and restricted critical imports.
Iranian officials are increasingly warning about the economic damage. Parliamentary Speaker Mohammad Bagher Ghalibaf has even pushed back against hardliners who oppose negotiations with Washington, arguing that military strength means little if the economy collapses.
The Bond Market War
While Bessent is leading Washington’s financial campaign against Iran, he is also fighting another battle at home: the bond vigilantes.
The term, coined by Wall Street veteran Ed Yardeni in the 1980s, describes investors who punish governments for excessive deficits by selling bonds and pushing yields higher.
Today, the U.S. deficit is on track to approach $2 trillion despite solid economic growth and low unemployment. The bond market appears to be losing patience as Washington shows little appetite for fiscal restraint.
Higher yields make servicing America’s roughly $40 trillion debt increasingly expensive, with annual interest costs already around $1 trillion. They also raise borrowing costs throughout the economy.
Last week, Bessent surprised Wall Street by announcing plans to increase Treasury buybacks after the 30-year yield reached its highest level in nearly two decades.
The initial $4 billion program briefly pushed yields lower. But they quickly rebounded, highlighting the problem: $4 billion is tiny compared with a roughly $32 trillion Treasury market.
Bessent, however, may have considerably more ammunition.
According to CNBC, the Treasury could potentially tap its General Account to expand the buybacks. The account has grown to roughly $950 billion under Bessent, compared with around $550 billion to $600 billion during the Biden administration.
That growing intervention is raising concerns about “financial repression”—policies that allow governments to influence markets and keep borrowing costs artificially low.
The Treasury’s recent actions extend beyond bond buybacks. Bessent also intervened in currency markets alongside Japan last month in a way that helped relieve pressure on bond yields, including the U.S. selling euros rather than dollars to support the yen and Japan making use of the Federal Reserve’s FIMA facility.
George Saravelos, Deutsche Bank’s head of FX research, described the bond-buyback strategy and encouragement to use FIMA as “soft-form financial repression” aimed at containing the long end of the U.S. yield curve.
In other words, Bessent is fighting a financial war on two fronts.
Abroad, he is trying to use America’s financial system to squeeze Iran.
At home, he is trying to use that same financial firepower to keep the bond market from squeezing Washington.
