Published on Aug 21, 2026
This article was written by Adem Tumerkan
Content Editor, Dunham | 2025 ThinkAdvisor Luminary Award Winner | 2026 Wealthies Finalist — Thought Leader of the Year | Macroeconomics, markets, geopolitics & global trends
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Washington is trying to tame the long end of the bond market by shifting debt shorter. At the same time, U.S. corporate profits are at record highs, while credit investors are growing more wary of the AI spending boom.
On August 19, 2026, the Treasury Department announced1 it will at least double the maximum size of its long-term buyback operations to $4 billion from $2 billion after the 30-year yield hit its highest level in roughly 19 years.
Every mortgage rate, corporate loan, and car payment in the U.S. prices off that long end of the curve - so when it spikes, so do your borrowing costs. The Treasury moving to try and cap it is Washington admitting borrowing costs have become a political liability as affordability issues grind on. But the angle here is a debt swap - not new spending - which matters for how you should read it.
What the Treasury is doing is called a debt-buyback. And that’s an important distinction.
Why? Because when most people hear "the government is buying bonds" they think QE (aka money printing to repay debt).
But the Treasury doesn't create money when it does this. It pays for every dollar of long bonds it buys back by borrowing somewhere else - mostly short-term bills.
I like to call it The Debt Reshuffle.
The Treasury is refinancing by taking older, long-term debt off the table and paying for it with new, short-term debt. Thus, the total amount owed doesn't change - just the shape of the yield curve.
Think of it like swapping a 30-year mortgage for a bunch of 2-year loans
That’s essentially what the US Treasury is being forced to do as long-term yields surge.
It’s the same trick the Fed pulled in 2011 - called Operation Twist2. But this time the Treasury is doing it alone (is the Treasury trying to do its own form of yield curve control?).
But here's the tricky part. . .
This is the Treasury Secretary Scott Bessent placing a huge bet.
He's betting that both inflation and interest rates will be lower by the time that short-term debt comes due, so the Treasury can roll it over at a cheaper rate down the road.
It’s basically the government version of taking an adjustable-rate mortgage because you expect rates to fall, instead of locking in today's high fixed rate for thirty years.
That bet only pays off if rates actually fall.
If they don't, Treasury just swapped one problem for a potentially bigger one.
And this is a big deal right now because interest costs on the national debt have become one of the biggest line items in the federal budget.
For instance, federal interest payments are running at a $1.25 trillion annualized rate3 as of Q2 2026 - up ~140% from Q4 2020 - and a 17%-a-year pace that's outrun nearly every other part of the budget. That means the per growth of interest payments is rising faster than Medicare, Social Security, defense, etc.
Thus, the Treasury is getting aggressive by trying to juggle optics between buybacks and racing the clock - betting it can push enough debt into shorter maturities now and refinance it cheaper later.
Hopefully, that pays off before the interest bill eats any more of the budget alive. Or worse, bond markets revolt.
For now, I'd wager we can expect more things like this as the national debt continues to spiral higher.
Nonfinancial corporate profit margins - after-tax profit divided by gross value added - are running near 14-15% this decade, the highest level on record4 and well above the previous peak of roughly 10% in the 1950s.
Profit margins this high are historically rare – with the last two times they showed up being in the 1920s and the late 1940s (both periods of turbulence). This is a big deal because record margins raise a real question about how firms got there and whether the current run has the same staying power as the underlying fundamentals, or whether it's riding on something narrower and more fragile (deficit/debt-fueled spending).
The current corporate profit boom is made up of at least two themes - and they behave differently.
The first is structural. Corporate markups (the ratio of prices to marginal cost) have climbed from around 1.2x in the early 1980s to roughly 1.6x today5, and rising market concentration alone explains a third of that increase. That's a decades-long trend of automation, pricing power, globalization, and leaner firms.
The second is brand new - the AI capex boom6. This surge is boosting profits on top of that older trend, and it's showing up in a place that's easy to miss if you're only watching the domestic numbers.
Look at where profits are actually getting booked globally.
U.S. profits as a share of the entire OECD (the 38 “rich countries" club) total have climbed from roughly the high-40s in late 2022 (right as the AI boom took off) to the mid-60s today - hitting a record high.
Meanwhile, America's share of global revenue has barely moved.
Put simply, the U.S. is capturing a bigger and bigger share of global profits.
So, this is a big reason to be bullish U.S. equities – the profits seem to justify ever-loftier expectations.
But remember - every major profit boom in history eventually ran into the same wall.
Depreciation rises, competitors pour in, and supply expands too much until margins sink.
It didn’t matter if this was the 1880s railroad mania7, the “roaring” 1920s radio boom, or the 1990s tech boom – profits evaporated8.
Either way – the decades-long climb in pricing power gave margins a higher floor to start from – and the AI capex wave is what's pushing them through the ceiling.
But history says every boom like this eventually reverts once supply catches up.
The hope right now is that this cycle still has much more room to run before it does.
Figure 2: Bloomberg (August 2026)
Credit default swap spreads (CDS) on major cloud infrastructure providers have widened sharply enough that Societe Generale9 now puts the group's implied cumulative default probability at roughly 7%, above the roughly 4.5% average for investment-grade credit broadly.
Bond investors get called the "smart money" (half-jokingly), but there's a real reason for it – because they only get paid back if the company survives, so they tend to price risk earlier than stockholders chasing upside do. Right now, those two groups are looking at the same handful of AI infrastructure builders and reaching completely different conclusions. History says the credit side usually catches trouble first.
Let's start with the basics - because most people have never heard of a CDS.
It stands for credit default swap10 – which is insurance on a bond.
Imagine this scenario.
An investor holding a company's debt can buy a CDS contract from another investor, paying a regular premium in exchange for a promise. Why would they do that? Because if the company does default on the debt he's owed, the CDS seller pays out – thus it's a hedge.
This is what makes CDS spreads useful to watch.
The premium you pay isn't fixed - it moves in real time based on how risky the market thinks that company's debt has become. Said another way, a cheap premium = low perceived risk, and a premium spiking = the market's getting nervous about something.
And this is where the AI boom is showing some trouble.
Right now, the CDS market is showing a flashing red light on the companies building America's AI infrastructure.
Spreads on this group have widened enough that one major bank now puts the implied cumulative default probability across hyperscalers at roughly 7% vs. about 4.5% for investment-grade credit as a whole.
Simply put, the insurance market is saying this specific group of borrowers looks meaningfully riskier than the average investment-grade company - even though these are some of the most profitable businesses in the world.
So, why would CDS spreads blow out on companies with that kind of profitability? A few reasons.
The point is - a CDS spread is the bond market showing concern for these firms – even as their stocks surge higher and keep hitting new highs.
Someone is wrong.
And historically, it’s usually the bond investors who are right.
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