• The Trump administration’s line of thinking about using longer-term rates to lower borrowing costs is a “sound” one, but the method of getting there “needs focus,” said Gregory Faranello, head of U.S. rates trading and strategy at AmeriVet Securities in New York. “In a nutshell, it is hard to have your cake and eat it too,” he said, adding that bond yields respond favorably when tariff policies are “watered down.”

‘Who is in control of 10-year yields? The answer is quite simple: THE MARKET,’ chief investment officer says

Federal Reserve Chair Jerome Powell may be breathing easier now that the Trump administration intends to focus on the 10-year Treasury yield, instead of rate cuts, to lower borrowing costs. But for some market participants, the news was raising problematic questions.

Treasury Secretary Scott Bessent shed light on the administration’s current thinking during interviews with the Fox Business Network’s “Kudlow” program on Wednesday and Bloomberg Television on Thursday. Bessent said he and Trump are
focused on the 10-year yield BX:TMUBMUSD10Y, and that the president is not calling for the Fed to lower rates. Bessent also told Bloomberg that the 10-year rate should be able to come down “naturally” as the result of Trump’s policies.

These comments helped alleviate concerns that the new administration might apply pressure on the independent Fed following Trump’s Jan. 23 demand that interest rates drop immediately – which only reinforced longstanding worries
about his approach toward the central bank.

By the same token, Bessent’s remarks led market participants to raise a number of likely obstacles that could stand in the administration’s way – everything from the inflationary impacts of tariffs, to an almost $2 trillion U.S. budget deficit for the 2024 fiscal year that implies even more deficits and greater Treasury issuance are on the way in the years to come.

Mark Malek, chief investment officer at New York-based wealth adviser Siebert, made one obvious point by raising this question: “Who is in control of 10-year yields? The answer is quite simple: THE MARKET,” Malek wrote in an email. “It is the market that pushed 10-year yields higher recently. Bond vigilantes, if you will. Those yields have risen as a result of expected inflation resulting from trade friction (tariffs and trade wars), and the expected rise in deficit spending and the resulting rise in government debt.”

Over recent months, the benchmark 10-year yield – which is used to establish borrowing costs on everything from mortgages to car and student loans – has jumped more than a full percentage point to as high as 4.802% on Jan. 13, from 3.622% on Sept. 16. On Thursday, it finished at just under 4.44% after having fallen during much of this week following Trump’s announcement of U.S.-imposed tariffs on Mexico and Canada, along with his subsequent decisions to delay them.

Malek said the Trump administration could theoretically cause the 10-year yield to decline by persuading the Fed to go into the open market and buy the underlying government note, which would cause the price of that maturity to rise and push down its yield. This is referred to as yield-curve management – something that Malek said is a possible, but unlikely, thing for the president
to do.

Until last year, the Bank of Japan was a longstanding practitioner of yield-curve control, aiming for short-term rates close to minus 0.1% and the country’s 10-year yield to be around zero. During and after World War II, the U.S. also used yield-curve control to finance war debt starting in 1942; this lasted through 1951.

According to Malek, the Treasury Department could also theoretically conduct a buyback of outstanding long-maturity Treasurys and finance this buyback by selling short-maturity notes and bills, which would have a more immediate impact on the 10-year yield. Such moves would be similar to those taken by the Fed during its Operation Twist program of 2012.

During Thursday’s session, yields on 2- BX:TMUBMUSD02Y, 10- and 30-year BX:TMUBMUSD30Y government debt finished slightly higher, suggesting Bessent’s remarks were having a limited impact for now. The 10-year yield rose for the first time in four sessions, while stocks DJIA SPX COMP closed mixed.

The Trump administration’s line of thinking about using longer-term rates to lower borrowing costs is a “sound” one, but the method of getting there “needs focus,” said Gregory Faranello, head of U.S. rates trading and strategy at AmeriVet Securities in New York. “In a nutshell, it is hard to have your cake and eat it too,” he said, adding that bond yields respond favorably when tariff policies are “watered down.”

The challenge in the short term is that “we are running above-trend growth of between 2% to 2.5% and inflation between 2.5% and 3%,” he said via phone. “So how much lower can rates go? If we are able to get energy prices down from here, rates will come down in the long end and short end, too. That, to me, should be the objective: focusing on energy prices, policy and supply. When you throw in other variables like tariffs, it becomes harder for markets to interpret.”

Moreover, the large amount of government debt hitting the market every month to finance the government’s operations “makes it very challenging” to bring rates down and keep them there, according to Faranello.

While the Treasury Department could still do an Operation Twist-style program, Faranello added, “I’m not too sure it makes a ton of sense, given that the ability to do that is limited and the longer-term effect of these operations don’t have a meaningful impact. The biggest driver in terms of interest rates is inflation.”