The Trump administration's emerging focus on long-term Treasury bond yields may show growing sensitivity to market constraints that could impede President Donald Trump's economic plans, while also getting the Federal Reserve out of his direct line of fire.
Yields on 10-year Treasury notes, influential in determining borrowing costs for everything from the $12.6 trillion U.S. mortgage market to $5.8 trillion in bank lending to businesses as well as the government's own interest bill, are up more than three-quarters of a percentage point even as the Fed has cut its short-term interest rate by a full percentage point since September.
Fed officials, noting the anomaly and saying it's not something they have much control over, have offered a number of reasons for that divergence: From concerns about high U.S. government deficits, to lingering above-target inflation, to a global reset of post-pandemic financial conditions.
But whatever the cause, it seems that is where the eyes of Trump and Treasury Secretary Scott Bessent are trained more than on a Fed that the U.S. president has been prone to criticize.
In comments on Fox Business on Wednesday, Bessent said that when Trump speaks of wanting lower interest rates, he is referring to the yield on the 10-year Treasury - not the short-term rate set by the Fed. After rising above 4.8% in the week before Trump's January 20 inauguration, the 10-year yield has fallen to around 4.4% recently, reversing some of the rapid increases seen last fall.
Krishna Guha, vice chairman of Evercore ISI, said that a combination of factors, including expected deregulation along with Bessent's emerging plans for Treasury debt management, may have driven the recent decline in yields.
While that focus on the 10-year note "eases tension between the Fed and the new administration," Guha said it will also be critical to maintain, given the implication of higher bond yields to Trump's economic plans.
"The message from Bessent is consistent with our view that he has essentially one job – to try to prevent the 10-year yield from breaking 5%, at which point we think 'Trumponomics' breaks down, with equities rolling over and housing and other rate-sensitive sectors breaking lower," Guha wrote in an analysis.
KEEPING YELLEN'S BORROWING PLAN
The current 10-year rate remains far above what it cost to finance the government during Trump's first term, and is also greater than the roughly 2.5% rate of annual U.S. economic growth - an important metric in assessing debt dynamics and sustainability.
The Fed "did a jumbo rate cut and the 10-year went up," Bessent said, a market response that did not cause immediate concern at the central bank but does raise questions about how effectively monetary policy is influencing the broader economy.
"The president wants lower interest rates and ... in my talks with him, he and I are focused on the 10-year Treasury," Bessent said. "He is not calling on the Fed to lower rates. He believes that if we ... deregulate the economy, if we get this tax bill done, if we get energy down, then rates will take care of themselves and the dollar will take care of itself."
Trump, in fact, said on Sunday he thought it was proper that the Fed held interest rates steady last week - a rare endorsement in what has been a contentious relationship with Fed Chair Jerome Powell.
It may also have been at least a tacit recognition that he is facing a different economic landscape, and a different set of constraints, than during his first term, when the 10-year yield was initially just over 2% and moved higher in response to what were then Fed interest rate hikes that made Trump furious.
The short-term rate set by the Fed is intended to influence long-term yields. That is an important way that monetary policy affects broader borrowing conditions, and in doing so influences inflation by encouraging or discouraging spending and investment.
But the speed and degree of that transmission is largely out of the central bank's control.
Ultimately, it is the cost of benchmark securities like the 10-year Treasury that determines how much the government has to spend on interest costs to finance its deficits, and what consumers and corporations pay to finance home purchases and investments.
"We don't control long-term rates ... What drives long rates is complicated," and linked to things like Treasury debt issuance, market expectations of inflation, and global economic conditions, Goolsbee told reporters at an auto symposium in Detroit.
The yields reflect a broader and more global judgment about the state of the U.S. and the state of the world, and may be influenced as much by Bessent and Trump as by the Fed.
In his initial days at least, Bessent has acknowledged his own constraints, issuing U.S. debt for now in roughly the same mix of short and long-term securities as he had criticized former Treasury Secretary Janet Yellen for using.
Shifting to more long-term debt would be desirable, Bessent has said, while noting in a Wall Street Journal article last November that trying to sell more long-term bonds "may increase longer-term interest rates and will need to be deftly handled."
