Treasury Yields: A Pivot in Trump's Focus
The Trump administration is placing increasing attention on long-term Treasury bond yields, highlighting the growing significance of market constraints on President Trump's economic plans. This shift also relieves pressure on the Federal Reserve, which has been a target of Trump's criticism.
10-Year Yields: A Key Determinant of Borrowing Costs
Yields on 10-year Treasury notes play a crucial role in determining borrowing costs across various sectors, including mortgages, business loans, and government interest payments. Despite the Fed's recent 1% rate cut, 10-year yields have risen by more than three-quarters of a percentage point.
Divergence Between Fed and Market Yields
The anomaly between Fed short-term rate cuts and rising long-term yields has drawn attention. While the Fed acknowledges limited control over long-term yields, it attributes the divergence to factors such as concerns about government deficits, elevated inflation, and global financial conditions.
Trump's Focus on 10-Year Yields
President Trump and Treasury Secretary Scott Bessent have expressed a preference for lower 10-year yields. Bessent clarified that Trump's interest rate references apply to the 10-year Treasury, not the Fed's short-term rate.
Decline in 10-Year Yields
After reaching 4.8% prior to Trump's inauguration, 10-year yields have recently declined to approximately 4.4%. This reversal is attributed to potential deregulation and Bessent's plans for Treasury debt management.
Impact on Trump's Economic Plans
Analysts believe that higher 10-year yields could have adverse effects on Trump's economic policies. According to Krishna Guha of Evercore ISI, yields exceeding 5% could disrupt "Trumponomics," leading to a decline in stock prices, housing, and other rate-sensitive sectors.
Maintaining Lower Yields
The current 10-year yield remains higher than the cost of government financing during Trump's first term and above the U.S. economic growth rate. Bessent has emphasized the importance of maintaining lower 10-year yields.
Fed's Limited Influence on Long-Term Yields
The Fed recognizes that monetary policy's influence on long-term yields is indirect and limited. Ultimately, it is the cost of benchmark securities like the 10-year Treasury that determines interest expenses for the government, consumers, and businesses.
Chicago Fed President's Interpretation
Chicago Fed President Austan Goolsbee interprets the administration's comments as focusing on financing costs that directly impact real economic activity, rather than targeting the Fed. He acknowledges the complex factors influencing long-term yields and views them as a reflection of global economic conditions.
Bessent's Debt Issuance Strategy
Despite his earlier criticism of Janet Yellen's issuance strategy, Bessent has initially maintained a similar mix of short and long-term securities in Treasury debt issuance. He recognizes the potential impact of excessive long-term bond sales on interest rates and emphasizes the need for careful management.