Trump Administration Eyes 10-Year Treasury Yields to Lower Borrowing Costs
The Trump administration is implementing a strategy to reduce Americans' borrowing costs by targeting the 10-year Treasury yield (^TNX).
Focus on 10-Year Treasury Yields
National Economic Council Director Kevin Hassett has emphasized the importance of monitoring 10-year Treasury yields, which are influenced by market forces rather than central bankers. If these yields remain low, it indicates that markets believe inflation is under control and the Federal Reserve does not need to raise rates.
Policies to Promote Economic Growth
Treasury Secretary Scott Bessent has proposed a "3-3-3" plan to lower the 10-year yield. This includes reducing the deficit, sustaining economic growth at 3%, and increasing oil production by 3 million barrels per day.
Inflation and Yield Suppression
By controlling inflation and stimulating growth, the administration believes it can lower borrowing costs. James Fishback, CEO of Azoria, maintains that Elon Musk's Department of Government Efficiency (DOGE) will reduce wasteful spending and mitigate inflationary pressures.
Challenges to Influencing Yields
Influencing the 10-year yield can be complex as it is affected by economic growth, inflation, Treasury supply, and other factors. However, Hassett claims that the administration's policies have already reduced the yield by 40 basis points.
Bond Market Dynamics
Bond yields move inversely to prices. Investors demand higher yields when inflation expectations rise, as inflation erodes the value of bonds. The 10-year Treasury yield has fluctuated significantly in recent weeks, influenced by inflation readings and other factors.
Fiscal Prudence and Treasury Supply
Wilmer Stith, bond portfolio manager at Wilmington Trust, believes that reducing the deficit and lowering Treasury supply can help lower the 10-year yield. The Treasury Department has indicated that it will not increase Treasury supply.
Bond Vigilantes and Spending Control
Ed Yardeni, chief investment strategist at Yardeni Research, emphasizes the importance of controlling government spending to appease the "bond vigilantes" who can drive yields higher if concerned about fiscal sustainability.
Trade and Inflation
Trump's trade policies and tariff promises could impact inflation and yields. Some economists warn that tariffs could raise costs and push up borrowing costs, while others argue they could enhance growth depending on the response of foreign countries.
Treasury Purchases and Gold Revaluation
Matt Luzzetti, chief US economist for Deutsche Bank, suggests that the Treasury could increase demand for US Treasuries by purchasing them as a condition of tariff negotiations. He also proposes revaluing gold holdings on the Fed's balance sheet to generate funds for spending.