Besant's "toolbox" struggles under the double pressure of oil prices and weak consumption, Goldman Sachs: "There is a scent of stagflation in the market"

Yellen has been busy "putting out fires" in the bond market this week, but the market doesn't seem convinced.

U.S. Treasury Secretary Yellen has repeatedly sent policy signals, attempting to lower long-end U.S. Treasury yields through government bond buybacks and fiscal consolidation, but yields on the 10-year and 30-year Treasuries quickly rebounded after a brief dip. Meanwhile, oil prices soared over 7% in a single week, gold rose about 3.5%, the dollar weakened, and consumer data from Walmart and others also indicated a cooling trend.

The bond market won’t budge, oil prices are rising, and consumption is starting to weaken—multiple assets are moving at once as the market re-prices the “stagflation” narrative.

Rich Privorotsky, Head of Single Delta Trading at Goldman Sachs, said bluntly that currently, the cross-asset market is "permeated with the smell of stagflation." In his view, even though Yellen’s policy “toolbox” is extensive, the challenge of simultaneously handling long-term interest rates, fiscal deficits, energy prices, and weak consumption is growing.

Yellen repeatedly intervenes, but long-end U.S. Treasuries remain unmoved

On Thursday, Yellen stated that the Treasury's government bond buyback scale could exceed $400 million per session and referred to these operations as "Treasury Twist operations," emphasizing that the Treasury has a "large toolbox."

However, the market did not react enthusiastically. After the long-term bond buybacks, coordinated yen intervention, and further signals from the Treasury, the 10-year U.S. Treasury yield still rebounded to around 4.7%, and the 30-year rose to about 5.25%.

Privorotsky noted that, in his opinion, rather than whether long-end yields can keep falling, the weakening of the dollar might be the more interesting market signal.

Currently, the United States faces tremendous pressure from large-scale government bond issuance, while AI and data center construction continue to absorb massive amounts of capital. With sovereign and corporate financing demands expanding simultaneously, it is difficult for Treasury buybacks alone to fundamentally shift the supply-demand dynamics of long-end bonds.

Fiscal consolidation has also been met with skepticism from the market. Yellen previously proposed reducing expenditures by hundreds of billions of dollars through mechanisms like the "anti-fraud task force," but as Privorotsky points out, there is still significant uncertainty about whether these policies will be implemented, making it hard for the market to adjust long-term fiscal expectations based solely on promises.

Oil prices rise as consumption cools

Away from the bond market, the rally in oil prices is amplifying stagflation worries. Even more concerning, higher energy costs and weaker consumption are happening at the same time.

The latest Walmart data shows U.S. same-store sales growth at just 2.6%, the lowest in six years, with customer traffic growth slipping from 3% last quarter to 1.5%. While the company still raised its full-year guidance, management warned that when gasoline exceeds $4 per gallon, consumers begin to adjust their spending and make trade-offs.

Privorotsky describes the current U.S. economy as “barbell-shaped”: on one end, AI and data center spending draws huge capital, on the other, consumer spending is starting to come under pressure. Cross-asset performance likewise sends a stagflation signal—oil is climbing, gold is strong, the dollar is weakening, and long-end Treasury yields remain elevated.

At the same time, the gold/copper ratio is rising, the U.S. 10-year breakeven inflation rate has increased by nearly 10 basis points over the past two weeks, and the stagflation "basket" is up 6.7% this week. What the market is trading now is no longer just single-asset volatility, but the stagflation logic taking shape.

Next, the Jackson Hole meeting will be a key event. Privorotsky believes that whether Warsh sends a dovish or hawkish signal, the market may face a dilemma: a dovish tone could push up long-term rates and inflation expectations, while a hawkish approach might further suppress already cooling consumption. The Federal Reserve is facing an increasingly tricky problem: inflation has yet to recede, while growth is already coming under pressure.