Top Economic Advisers Target 10-Year Treasury Yields to Lower Borrowing Costs

President Trump's economic team is implementing a strategy to reduce borrowing costs for Americans by focusing on the 10-year Treasury yield, a measure that is influenced by financial markets rather than the Federal Reserve.

10-Year Treasury Yield as Inflation Barometer

National Economic Council Director Kevin Hassett stated that the 10-year yield provides insights into market expectations regarding inflation control. By suppressing inflation, the pressure on the Fed to raise short-term rates could be reduced.

Treasury Secretary's 3-3-3 Strategy

Treasury Secretary Scott Bessent unveiled the idea of targeting the 10-year yield through policies that stimulate economic growth, increase productivity, and reduce government spending. This "3-3-3" strategy aims to lower the deficit to 3% of GDP, sustain 3% growth, and boost oil production by 3 million barrels per day.

Lower Inflation, Lower Yields

Investment firm CEO James Fishback believes that the policies will lower both inflation and the 10-year yield. By controlling inflation and spurring growth, President Trump's initiatives will reduce borrowing costs and release capital for productive investments.

Challenges in Influencing 10-Year Yield

While the Fed's short-term rates can impact long-term rates, the 10-year yield is also influenced by economic outlook, inflation expectations, Treasury supply, and other factors. In the past, Fed rate cuts have actually led to higher long-term rates due to inflation concerns.

Bond Yield and Inflation

Bond yields move inversely to prices, meaning they rise with inflation as investors demand higher compensation for the erosion of bond value. The 10-year U.S. Treasury yield has fluctuated significantly in recent weeks, driven by inflation readings, Treasury supply expectations, and international factors.

Progress and Impact

Hassett claims progress in the effort to lower the 10-year yield, noting a 40 basis point decline in the past few weeks. This has saved Americans approximately $40 billion.

Elon Musk's Role

Elon Musk's Department of Government Efficiency (DOGE) is expected to reduce wasteful spending and alleviate fiscal pressures that contribute to inflation and higher yields.

Reducing Treasury Supply

Treasury portfolio manager Wilmer Stith believes that Bessent's primary tool for lowering the 10-year yield is reducing the deficit and subsequently the Treasury supply. DOGE's efforts to trim government spending could have a positive impact on Treasury auction supply and yields.

The Role of "Bond Vigilantes"

Investment strategist Ed Yardeni emphasizes the importance of controlling government spending to appease the "bond vigilantes" who can drive up yields to force government action. President Trump's ability to reduce spending will be critical in maintaining bond yield stability.

Trade Policy and Inflation

Trump's trade policies, including the imposition of tariffs, could impact inflation and yields. While tariffs may generate revenue, some economists warn of potential inflationary effects that could lead to higher borrowing costs.

Balancing Growth and Inflation

Monitoring the balance between growth risks and inflation risks is crucial. Tariffs may initially lower rates through safe-haven flows, but an escalation could push yields higher if inflation intensifies.

Alternative Yield Management Strategies

Deutsche Bank chief economist Matt Luzzetti suggests that Treasury could also increase demand for U.S. Treasuries by making purchases a condition of tariff negotiations, leading to dollar appreciation and smaller trade deficits. Additionally, revaluing the Fed's gold holdings could generate funds for spending.