Nomura Securities highlights intensifying competition for capital between US Treasuries and corporate debt from major technology firms as a key factor behind the recent breakdown of the Bessent "put," with upward pressure on global yields expected to persist.

Corporate bond spreads for leading tech companies widened rapidly last week, with some instruments hitting cycle highs. In an August 24 report, Nomura strategists noted this dynamic has created a funding tug-of-war with US Treasuries, driving long-end yields steadily higher and weakening the "put" effect Treasury Secretary Bessent intended to deliver through policy measures aimed at suppressing long-term rates. Meanwhile, concerns that the Federal Reserve is falling behind the curve continue to intensify.

The spread widening in tech debt has rippled across both equity and fixed income markets. The US 10-year real yield climbed further last week to 2.40%, returning to levels seen before the Treasury Department announced expanded bond buybacks. Markets currently price a 40% probability of a September rate hike, with the cumulative probability rising to 65% by October. The 2-year forward OIS rate, a proxy for the terminal rate, has pushed higher to 4.02%.

While the credit spread widening has yet to spill over into broader markets, and bank stocks' relative performance — an early indicator of credit tightening — has not shown a downtrend, analysts believe the situation warrants close monitoring. For Japan, weakness in US Treasuries poses a direct drag, with both Japanese bonds and equities expected to face pressure early this week.

Tech Debt Spread Widening Hits Stocks and Bonds Alike

Spreads on bonds issued by tech giants expanded rapidly last week, with some reaching historical peaks for this cycle. Nomura points to this as a significant driver behind the sustained rise in long-end yields — as investors allocate to US Treasuries, they face intense competition from tech corporate debt, creating a seesaw effect that pressures Treasury prices.

This pressure has negatively impacted both equity and fixed income markets. US tech stocks showed divergent performance last week: semiconductor shares declined while hyperscale cloud and software names advanced. Consumer-related stocks rebounded strongly, but other cyclical sectors were broadly weaker. In bond markets, the Treasury yield curve underwent a bearish flattening, with the short end leading losses amid rising rate hike expectations.

Nomura states that the credit spread widening has not yet evolved into broad-based credit tightening, and bank stocks' relative performance — a leading indicator for credit stress — has not shown a clear downtrend. Nevertheless, the firm believes the current situation deserves sustained attention and cannot be overlooked.

Bessent's "Put" Loses Traction as Yield Pressures Persist

The Bessent "put" concept refers to market expectations that Treasury Secretary Bessent would intervene through policy measures to support long-end Treasury yields, thereby curbing excessively rapid rate increases. However, Nomura believes the competition for capital between tech debt and Treasuries is one of the core factors preventing this protective mechanism from functioning effectively.

On the macro front, concerns about the Fed falling behind the curve are adding pressure. Nomura warns that Fed Chair Kevin Warsh may be underestimating AI's impact on growth and inflation, as well as shifts in funding supply and demand, leaving fiscal and monetary policy potentially too loose relative to actual economic conditions — at least that is how markets are interpreting it. Unless the Fed confronts this issue head-on and signals an intention to correct course, market worries about it falling behind will be difficult to dispel.

Later this week, Warsh is scheduled to speak on Friday, and his interpretation of current rate increases will be a market focal point. Meanwhile, Bank of Japan Deputy Governor Ryozo Himino is set to deliver remarks on Thursday, with markets pricing a relatively high probability of hawkish signals — September hike odds stand at 82%, higher than the Fed's 40%. Nomura expects Himino may hint at a September move but is unlikely to provide detailed guidance on the subsequent path, with terminal rate expectations (2-year forward OIS currently at 2.21%) unlikely to shift significantly.

Market drivers this week are expected to pivot distinctly between the first and second halves. The early part focuses on micro-level developments, centered on the US tech earnings season — beyond equity market reactions, the response in tech corporate bond markets also warrants attention. The latter half shifts to macro catalysts, with Japanese and US monetary policy set to dominate trading direction.