Trump Administration Aims to Lower Borrowing Costs by Targeting 10-Year Treasury Yields

The Trump administration is prioritizing the reduction of Americans' borrowing costs by focusing on the 10-year Treasury yield (^TNX) rather than immediate monetary policy changes at the Federal Reserve.

Economic Strategy

National Economic Council Director Kevin Hassett believes that monitoring long-term interest rates, which are less directly influenced by the Fed, provides valuable insights into the market's perception of inflation control. A lower 10-year yield would indicate that the markets expect inflation to remain under control, reducing pressure on the Fed.

Treasury Secretary Scott Bessent introduced the "3-3-3" strategy to achieve this goal:

* Reduce the deficit from 6% to 3% of GDP
* Sustain economic growth at 3%
* Increase oil production by 3 million barrels per day

Government Efficiency

James Fishback, CEO of Azoria, suggests that the Department of Government Efficiency (DOGE), led by Elon Musk, will play a crucial role in reducing wasteful expenditures and inflation pressures, ultimately resulting in lower borrowing costs.

Influencing 10-Year Treasury Yields

While the Fed's short-term rates can influence the 10-year yield, other factors such as economic growth outlook, inflation expectations, and Treasury supply also play a role. The recent volatility in the 10-year yield highlights the complexities involved in controlling it.

Bond Yields and Inflation

Bond yields move inversely to their prices, rising when inflation is expected to increase. The 10-year US Treasury yield had been climbing in mid-January due to inflation concerns.

Impact on Mortgages and Loans

Lowering the 10-year yield would result in lower interest rates on mortgages, small business loans, credit cards, and other borrowings, benefiting American consumers and businesses.

Deficit Reduction and Treasury Supply

Wilmer Stith, bond portfolio manager at Wilmington Trust, believes that reducing the deficit and lowering the supply of Treasuries will help lower the 10-year yield. The Treasury Department has indicated that it does not plan to increase its supply.

Impact of Trade Policies

Trump's trade policies, including the imposition of tariffs, introduce an element of uncertainty regarding their impact on inflation and borrowing costs. Some economists speculate that tariffs could be inflationary and push up borrowing costs, while others suggest a dampening effect on growth due to retaliation.

Conclusion

The Trump administration is implementing a multifaceted strategy to lower Americans' borrowing costs by targeting the 10-year Treasury yield. This approach involves promoting economic growth, cutting government spending, and potentially adjusting trade policies. The complex interplay of economic factors and market dynamics will determine the effectiveness of this strategy.