U.S. Treasury Secretary Scott Bessent's pledge to contain yields on 10-year Treasury notes met some skepticism in the bond market on Thursday, as inflationary pressures and expectations of a widening federal deficit threaten to outweigh efforts to curb borrowing costs.
Bessent said in an interview with Fox Business on Wednesday that while President Donald Trump wants lower interest rates, he will not ask the Federal Reserve to cut rates, and that he and the president were intently focused on the 10-year Treasury yield. He added that lower energy prices will help contain price pressures, while spending cuts will improve the fiscal outlook.
Benchmark 10-year Treasury yields have a direct impact on mortgage and credit card rates as well as consumer loans, while the Fed's short-term interest rate impacts money markets and, only indirectly, borrowing costs.
But bond investors and analysts remained somewhat unconvinced by Bessent's comments, as Trump's trade and fiscal policies are expected to push long-term Treasury yields higher, despite lower energy prices and government spending cuts.
"The bigger issue in the inflation complex is service-sector inflation, and the stickiness of inflation generally in the past number of months," said Padhraic Garvey, regional head of research for the Americas at ING. "The tariff agenda can only place upward pressure on prices, and, in fact, (is) likely to prove more impactful than the energy price containment plan," he added.
The yield on 10-year Treasury notes, last at 4.43%, hit a seven-week low on Wednesday due to factors including signs of a slowing economy, as well as some safe-haven buying due to geopolitical uncertainty and guidance from the Treasury Department this week that assuaged market concerns about imminent increases in long-term government debt issuance.
However, yields inched higher on Thursday. Short-term yields were on an upward trajectory earlier this week as Trump's threat of punitive tariffs on key U.S. trade partners fueled concerns about higher inflation, while long-term yields drifted lower in a safe-haven bid.
Even if they stabilized after the president delayed the tariffs on Mexico and Canada, trade war risks loom over markets.
"Yes, it is a good idea to try to keep 10-year Treasury note yields low and perhaps get them lower. But the question is who is in control of 10-year yields? The answer is quite simple: the market," said Mark Malek, chief investment officer at Siebert.
"It is the market that pushed 10-year yields higher recently ... as a result of expected inflation resulting from trade friction ... and the expected rise in deficit spending and the resulting rise in government debt," he said in a note.
The Treasury Department did not respond to a request for comment.
'FUZZY SUPPOSITION'
Bessent said on Wednesday that 10-year yields have been decreasing recently because the bond market is recognizing the economy can achieve "non-inflationary growth" as energy prices will drop. "We cut the spending, we cut the size of government, we get more efficiency in government, and we're going to go into a good interest rate cycle," he said.
Still, 10-year yields, which move inversely to prices, are up about 70 basis points since early October, when investors started to increasingly price in a Trump victory in the November 5 U.S. election.
Meanwhile, billionaire Elon Musk has acknowledged that plans by his Department of Government Efficiency (DOGE) to cut government spending by $2 trillion are a long shot.
"At the moment a large degree of fuzzy supposition is required to extrapolate a meaningful degree of success," ING's Garvey said in reference to the DOGE effort.
For Robert Kaplan, vice chairman of Goldman Sachs and a former president of the Dallas Fed, high government debt levels will likely drive long-term yields higher going forward.
"The jury is still out on how much progress we're going to make on the fiscal side," he said. "If we make progress you'll see some improvement there. I think you're still more likely to have an upwardly sloping yield curve."
