Woofun AI reports that a distinct market divergence emerged on August 25, characterized by simultaneous gains in U.S. Treasury bonds, gold, and Bitcoin alongside a decline in crude oil prices, while the U.S. dollar remained robust and tech stocks continued to underperform. This complex asset rotation was primarily triggered by two divergent policy signals issued by U.S. Treasury Secretary Scott Bessent, which simultaneously altered expectations for debt management and geopolitical risk.

The first signal involved speculation that the Treasury might utilize funds from the Treasury General Account (TGA) to finance expanded buybacks of long-term Treasuries, while the second indicated a strategic pivot toward economic sanctions against Iran rather than escalating military confrontation. These developments collectively suppressed yields on long-term government debt and oil prices, providing a tailwind for safe-haven assets like gold and crypto, yet failed to bolster the broader equity market as adjustments in the AI and semiconductor sectors weighed heavily on the Nasdaq Composite.

The mechanics behind the potential Treasury intervention represent a significant shift in funding strategy for the buyback program. Previously, the Treasury announced expanded repurchases of bonds with maturities ranging from 10 to 30 years, a move the market initially interpreted as a 'twist operation' designed to alter the debt maturity structure by increasing the issuance of short-term T-bills while retiring long-term debt.

However, the latest development suggests the Treasury may bypass new short-term debt issuance entirely, instead drawing directly on the cash reserves stored in the Federal Reserve's TGA. Martin Tobias, a rate strategist at Morgan Stanley, estimates that the Treasury could withdraw between $80 billion and $200 billion from the TGA to fund these bond buybacks. This potential source of funding is substantially larger than the scale of previously announced operations, leading some traders to view it as a 'stronger tool' for stabilizing the long-term bond market. By accessing existing liquidity rather than issuing new debt, the Treasury aims to directly influence the supply dynamics of long-dated securities without expanding the overall debt stock through new borrowing.

The immediate reaction in the bond market reflected this shift in supply expectations, resulting in improved performance for long-term Treasuries and a flattening of the yield curve. Despite the price gains, market expectations for a rate hike in 2026 rose slightly to around 27.4 basis points, indicating that the rally in long-term bond prices was driven mainly by supply and demand dynamics and changes in policy expectations rather than a sudden shift toward accommodative monetary trading.

It is crucial to note that the use of TGA funds to finance buybacks remains a media report and market speculation at this stage, not an official Treasury plan. Even if implemented, such actions would primarily improve liquidity and adjust the structure of tradable bonds in the market, rather than equating to quantitative easing by the Federal Reserve. The distinction is vital: while QE involves the creation of new central bank reserves to purchase assets, TGA-funded buybacks are essentially a reshuffling of existing government cash balances, offering a more targeted but limited impact on the broader monetary base.

Institutional skepticism regarding the efficacy of these buybacks in lowering long-term interest rates remains widespread on Wall Street. Institutions like Goldman Sachs and Wells Fargo argue that expanded buybacks do not address the root causes of recent rises in long-term yields, which are driven by structural factors rather than temporary liquidity constraints. George Cole and William Marshall, strategists at Goldman Sachs, contend that even if buybacks are expanded further, they may not be sufficient to significantly reset interest rate levels.

The recent pressure on long-term Treasuries is still the result of combined factors such as fiscal deficits, Treasury supply, persistent inflation, and term premiums. The Treasury can improve the liquidity of some older bonds through buybacks and optimize supply and demand to some extent, but it cannot directly reduce the government's underlying financing needs. Consequently, the market views the buyback program as a tactical adjustment rather than a strategic solution to the broader debt sustainability challenge.

Further complicating the rate outlook, strategists at Societe Generale, Deutsche Bank, and RBC Capital Markets predict that as long-term yields continue to rise relative to short-term yields, the yield curve could become steeper again. This expectation explains why the 'stagflation stock portfolio' compiled by Goldman Sachs has continued to perform well recently, as the market balances short-term policy support with pricing in longer-term fiscal and inflation risks.

The divergence between short-term and long-term rate expectations highlights the market's concern that fiscal dominance may eventually override monetary policy efforts to control inflation. Thus, the expectation of TGA-backed buybacks seems more like adding a layer of liquidity protection to the long-term bond market rather than completely reversing the interest rate trend. Investors are increasingly focused on the structural mismatch between government borrowing needs and the capacity of the financial system to absorb that debt without demanding higher risk premiums.

Woofun AI data shows that the decline in oil prices was driven by another policy development, specifically the recovery of tanker traffic in the Strait of Hormuz under U.S. protection. Reports indicate that around 40 tankers carrying about 16 million barrels of crude oil passed through the southern route of the Strait of Hormuz on Friday night. Kpler data showed that another 30 vessels passed through the strait over the weekend, along with 83 vessels through the Strait of Mandeb. Although Iran has questioned these figures, the oil market has temporarily accepted the signs of restored shipping, leading to a drop in the geopolitical risk premium. The UK Office for Maritime Trade later reported that a Saudi tanker was attacked in the Red Sea, causing oil prices to rebound briefly.

However, after Bessent announced an 'economic D-Day' against Iran, targeting third-party entities involved in purchasing and transporting Iranian oil, oil prices fell again. The market interpreted this statement as indicating that the U.S. prefers to use secondary sanctions to cut off Iran's oil revenues rather than expanding military actions directly.

Compared to further damaging energy infrastructure or blocking shipping routes, economic sanctions have a relatively limited immediate impact on global crude oil supply, which contributed to the sustained decline in prices. Yet, this optimistic outlook remains fragile, as Iran has previously avoided sanctions through shadow fleets and intermediary trades and has also threatened retaliation against countries supporting U.S. initiatives. If shipping is disrupted again, the oil price premium could rise rapidly, undoing the recent gains in safe-haven assets.

The decline in oil prices does not mean that the risk of energy inflation has disappeared; rather, the nature of the risk is shifting from crude supply shortages to refined product bottlenecks. Shipping risks in the Strait of Hormuz and the Red Sea continue to affect the transportation of refined oil products, while drone attacks in Ukraine limit Russia's fuel supply. At the same time, global refining capacity has become a new supply bottleneck, keeping prices of refined products like diesel high relative to crude oil.

TotalEnergies' management believes that as more crude oil passes through the Strait of Hormuz, the outlook for crude oil prices is bearish; however, due to ongoing tightness in refined oil supply, prices of products such as diesel and gasoline may remain strong. This suggests that the transmission mechanism of energy inflation is changing: concerns about crude oil shortages have eased, but refinancing and transportation bottlenecks may still affect corporate costs and consumer inflation through refined oil prices.

The divergence between crude and refined product prices highlights the structural constraints in the global energy system, where refining capacity has not kept pace with demand growth. As a result, even if crude prices fall, the cost of energy for end-users may remain elevated, posing a persistent risk to inflation expectations and monetary policy normalization. This dynamic underscores the complexity of the current energy landscape, where geopolitical risks and supply chain constraints interact in non-linear ways.

Compared to the rises in bonds, gold, and Bitcoin, U.S. stocks showed significant divergence, with South Korean tech stocks weakening first as Samsung's largest-ever shareholder return plan fell short of market expectations. This disappointment was followed by pressure on U.S. semiconductor and AI sectors, as investors rotated away from high-valuation growth stocks toward more defensive positions. Most major U.S. stock indices declined, with only the Dow Jones index rising driven by financial stocks; the Nasdaq Composite led the declines.

By sector, essential consumer and financial stocks were relatively more resilient, while tech and energy stocks both dropped by more than 1%. Key AI-related sectors such as optical communications and semiconductors generally weakened, reflecting a broader loss of confidence in the near-term growth prospects of the technology industry. The rotation away from tech stocks suggests that investors are becoming more selective, favoring companies with strong cash flows and lower valuations over those with high growth expectations but uncertain profitability.

NVIDIA has fallen for seven consecutive trading days, setting the longest streak of losses since September 2022, and its credit default swap spread has risen to record highs. With NVIDIA's earnings report, the Jackson Hole central bank meeting, and various U.S. policy updates approaching, investors are actively reducing their risk exposure.

Notably, while index volatility rose alongside the decline in market indices, volatility among individual stocks decreased. This divergence indicates that investors are more concerned about systemic risks related to macro policies and sectoral trends rather than unexpected events involving individual companies. Overall, the main theme of the market that day was not simply risk aversion or accommodative trading. Expectations of Treasury buybacks improved the supply and demand dynamics for long-term bonds, reduced Iran-related risks lowered oil prices, and gold and Bitcoin benefited from falling real interest rates and policy uncertainty.

However, tech stocks failed to rally, suggesting that AI-related trading is moving from a liquidity-driven phase into a period of focused evaluation of earnings, valuations, and returns on capital expenditures.