Forty Trillion Reasons the Fed and Treasury Are at Odds

On Investing, the weekly markets podcast from Charles Schwab hosted by Chief Investment Strategist Liz Ann Sonders and Senior Fixed Income Strategist Collin Martin, returned on August 28, 2026¹ with a timely and layered conversation about the forces reshaping U.S. markets: persistent inflation, Treasury intervention in the bond market, a strained relationship between monetary and fiscal policy, and a secular shift in the stock-bond correlation regime that demands a rethinking of portfolio construction.

The conversation opens with the July PCE report, which showed headline inflation at 3.7% year-over-year and core PCE at 3.3%. Sonders notes the report's character: "You don't tend to get PCE prints that are well outside what is typically a very narrow band in terms of expectations," owing to how closely economists can map CPI and PPI components onto PCE. The numbers were not a surprise. They were, however, a reminder. Inflation is sticky, it has multiple engines, and the usual suspects are no longer the only culprits.

AI as an Inflation Driver

One of the more striking analytical threads concerns artificial intelligence. Consensus holds that AI is ultimately disinflationary, a productivity multiplier that should moderate prices over time. But Sonders flags an important short-term complication. The capital spending behind the AI build-out is import-heavy, and imports net against exports in the GDP calculation. "The math within the GDP equation is that you net imports and exports," she explains, noting that booming AI-related capital spending and rising import prices are actually creating a drag on headline GDP. Meanwhile, the inflationary pressure from that equipment spending feeds directly into price measures. The AI dividend, it turns out, requires patience.

Treasury Intervenes

The central event of the week was Treasury Secretary Bessent's announcement that he would expand the scope of the Treasury's bond buyback operations, targeting off-the-run bonds to drive liquidity. Martin is direct about the subtext: "The increase in the buyback operation is less about managing liquidity and more about the Treasury just trying to buy more bonds in an attempt to lower yields."

The 30-year Treasury touched 5.3%, and the 10-year has been holding near 4.7%. By Bessent's lights, intervention was warranted. Martin acknowledges the legality and logic of the move but is unsparing about its limits: "This isn't likely the fix that the Treasury market needs. This is probably a short-term fix." The real driver of elevated yields, he argues, is not a technical imbalance but a fiscal reality. With $40 trillion in total debt and roughly $32 trillion in marketable obligations, the solution belongs to Congress, not the Treasury. Bessent is, as Sonders puts it plainly, "trying to attack the symptom" while the cause goes unaddressed.

The Fed in a Difficult Position

This is where the institutional tension sharpens. Fed Chair Kevin Warsh had previously described rising long-term yields as doing some of the Fed's inflation-fighting work for it. If the Treasury now acts to suppress those yields, financial conditions ease. Easier conditions can mean more spending and, eventually, more inflation. "They're kind of at odds right now," Martin says.

Both hosts acknowledge that this dynamic raises a credibility question, not only for the Fed but potentially for the Treasury itself. If markets conclude that Bessent's buyback program is reactive rather than structural, they may demand higher yields as compensation for uncertainty. The cure could worsen the condition.

The End of the Great Moderation

The most consequential theme in the episode is the longer-arc one. Sonders frames the current environment as a departure from the Great Moderation Era, roughly the late 1990s through 2022, during which bond yields moved primarily on growth signals. In that regime, higher yields meant a stronger economy, which was good for equities. Bonds and stocks moved in opposite directions, providing the diversification that made the 60/40 portfolio a reliable construct. That correlation has flipped. "We're now back in negative correlation territory," Sonders observes, noting that the prior analog, the mid-1960s through the mid-1990s, was an era when yields moved on inflation rather than growth. In that environment, bonds and stocks moved together, and simple diversification was harder to achieve. That era is back.

The implication is not that bonds should be abandoned, Sonders is careful on this point, but that investors should consider broadening their toolkit: commodities, real assets, precious metals, and private markets, both equity and credit, all warrant attention.

Five Key Takeaways for Advisors and Investors

1. Inflation has multiple, durable engines. AI capital spending, tariffs, and services costs are all contributing. The path to 2% is neither clear nor near.
2. Treasury's bond buyback expansion addresses the symptom, not the cause. The structural fix for elevated yields requires fiscal restraint, which remains politically out of reach.
3. The Fed and Treasury may be pulling in opposite directions. Bessent's move to suppress long-term yields could ease financial conditions and complicate the Fed's inflation mandate.
4. The stock-bond correlation regime has shifted. The Great Moderation Era is over. Advisors should revisit whether traditional 60/40 allocations provide adequate diversification in an inflation-driven yield environment.
5. Broader diversification is the appropriate response. Real assets, commodities, and private market allocations can provide balance when stocks and bonds move together.

Footnote:

1 Sonders, Liz Ann, and Collin Martin. "The Bond Market Strikes Back." On Investing, Charles Schwab, 28 Aug. 2026, https://www.schwab.com/learn/story/bond-market-strikes-back.