WASHINGTON (Reuters) - 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.