Trump vs. the US$30 trillion bond market: an uneasy standoff

A picture of U.S. President Donald Trump is displayed on a computer on the floor of the New York Stock Exchange in New York (AP Photo/Seth Wenig)

NEW YORK — Since U.S. President Donald Trump’s ‘Liberation Day’ tariffs pushed the U.S. bond market into revolt in April, his administration has carefully tailored its policies and messaging to prevent another flareup. But the truce remains fragile, some investors say.

A reminder of that fragility came on Nov. 5 when the Treasury Department signaled it was considering selling more long-term debt. The same day, the Supreme Court began hearing arguments over the legality of Trump’s sweeping trade tariffs. Benchmark 10-year bond yields, which have fallen steeply this year, spiked more than six basis points – one of the biggest jumps in recent months.

With the market already uneasy about the size of U.S. federal deficit, the Treasury proposal stirred fears among some investors of upward pressure on long-dated bond yields. The Supreme Court case, meanwhile, raised doubts about a major source of revenue to service the US$30 trillion pile of government debt held by the market.

Citigroup analyst Edward Acton called the moment “a reality check” in a Nov. 6 daily report.

Reuters spoke to more than a dozen executives at banks and asset managers overseeing trillions of dollars in assets who said that beneath the relative calm of bond markets in recent months a battle of wills is playing out between the administration and investors concerned about the persistently high U.S. deficit and debt levels.

Reflecting those worries, the so-called “term premium” - the extra yield investors demand for holding U.S. debt for 10 years - has once again started to rise in recent weeks.

“Bond markets’ ability to terrify governments and politicians is second to none, and you’ve seen that in the U.S. this year,” said Daniel McCormack, head of research at Macquarie Asset Management, referring to April’s bond crash which forced the administration to temper its plans for tariff increases.

Over the long term, the failure to resolve strains on public finances can create political issues as voters grow “persistently disappointed with government delivery,” McCormack said.

Treasury Secretary Scott Bessent – a former hedge fund manager - has repeatedly said he is focused on keeping yields down, especially on the benchmark 10-year bond, which affects the cost of everything from the federal government’s deficit to household and corporate borrowing.

“As Treasury Secretary, my job is to be the nation’s top bond salesman. And Treasury yields are a strong barometer for measuring success in this endeavor,” Bessent said in a Nov. 12 speech, noting borrowing costs were down across the curve. The Treasury did not respond to a request for comment for this story.

Such public messaging and behind-the-scenes interactions with investors have convinced many in the market the Trump administration is serious about keeping yields in check. Some unwound bets over the summer that bond prices would fall after the Treasury proposed increasing purchases under an ongoing buyback program meant to improve market functioning, data shows.

The Treasury has also discreetly sought investors’ opinions on major decisions, with one person familiar with the matter describing them as “proactive.”

In recent weeks, the Treasury consulted with bond investors on five candidates for the Federal Reserve chair role, asking how the market would react to them, the person said. They were told it would react negatively to Kevin Hassett, director of the National Economic Council, because he is not perceived as independent enough from Trump.

Several investors said they believed the Trump administration has merely bought itself time with such steps and, with the U.S. still needing to finance an annual deficit of around six per cent of GDP, risks remain to peace in the bond market.

The administration is keeping bond vigilantes - investors who punish government profligacy by driving up yields - at bay, but only just, these market experts said.

Price pressures from tariffs, bursting of an artificial intelligence-led market bubble, and the prospect of an overly accommodative Fed pushing inflation higher could all upset the equilibrium, investors say.

“The bond vigilantes never go away. They’re always there; it’s just whether they’re active or not,” said Sinead Colton Grant, chief investment officer at BNY Wealth Management.

The vigilantes are watching

White House spokesman Kush Desai told Reuters the administration was committed to ensuring robust and healthy financial markets.

“Cutting waste, fraud, and abuse in runaway government spending and cooling inflation are some of many actions by this Administration that have increased confidence in the U.S. Government’s finances and reduced 10-year Treasury yields by nearly 40 basis points in the past year,” he said.

The bond market has a history of punishing fiscally irresponsible governments, sometimes costing politicians their jobs. Most recently, in Japan, Prime Minister Sanae Takaichi has grappled with keeping bond investors happy while trying to further her agenda.

When Trump began his second term, several indicators watched by bond traders were flashing red: total U.S. government debt stood at over 120% of annual economic output. Those worries flared after April 2 when Trump imposed massive tariffs on dozens of countries.

Bond yields - which move inversely to prices - saw their steepest weekly rise since 2001, as bonds sold off alongside the dollar and U.S. stocks. Trump backed off, delaying the tariffs and ultimately imposing them at rates below what he initially proposed. As yields retreated from what he described as a queasy moment, he hailed the bond market as “beautiful.”

Since then, 10-year Treasury yields have fallen over 30 basis points, and a measure of bond market volatility has recently fallen to its lowest in four years. On the surface, it seems that bond vigilantes have gone silent

Signals to the bond market

One reason for the silence, the investors said, is the resilience of the U.S. economy, with massive AI-led spending offsetting the drag on growth from tariffs, and with a Fed in easing mode because of a slowing job market; another is the steps the Trump administration has taken that signal to the market that it doesn’t want runaway yields.

On July 30, the Treasury said it was expanding a buyback program that will reduce the amount of long-dated, illiquid debt outstanding. The buybacks are meant to make it easier to trade bonds, but because the expansion was focused on 10-, 20- and 30-year bonds, some market participants wondered whether it was an effort to cap those yields.

The Treasury Borrowing Advisory Committee, a group of traders who advise the agency on debt, said there was “some debate” among its members whether it could be “misconstrued” as a way to shorten the average maturity of outstanding U.S. government bonds. The person who is familiar with the matter said some investors worried about the Treasury taking unconventional steps, such as an aggressive buyback program or reducing the supply of long-dated bonds, to limit yields.

As these discussions were going on over the summer, short positions – bets that long-dated Treasury bond prices would fall and yields would rise – fell, data shows. Short bets against bonds with at least 25 years of remaining term to maturity fell sharply in August. They have been ramping back up in the past few weeks.

“We’re in this age of financial repression with governments using various tools to artificially keep a lid on bond yields,” said Jimmy Chang, chief investment officer of the Rockefeller Global Family Office, part of Rockefeller Capital Management, which manages $193 billion in assets, calling it an “uneasy equilibrium.”

The Treasury Department has also taken other steps to support the market, such as leaning more heavily on short-term borrowing through Treasury bills to fund the deficit instead of increasing supply of long-dated bonds. It has also called on banking regulators to make it easier for banks to buy Treasury bonds.

JPMorgan analysts have estimated that the supply of U.S. government debt issued to the private sector with a maturity longer than one year would decline next year compared to 2025, even if the U.S. budget deficit is expected to remain roughly unchanged.

Demand for T-bills is expected to get a boost as well. The Fed has ended its balance sheet rundown, meaning it will be again an active buyer of bonds, particularly short-dated debt.

And the Trump administration’s embrace of cryptocurrencies has created a new significant buyer of such debt – stablecoin issuers.

Bessent said in November that the stablecoin market, valued at around $300 billion, could grow tenfold by the end of the decade, increasing demand for Treasury bills.

“I feel like there’s less uncertainty in the bond market; there’s just more equalization in terms of supply and demand,” said Ayako Yoshioka, portfolio consulting director at Wealth Enhancement Group. “It’s been a little odd, but it’s worked so far.”

The question for many market participants, however, is how long it can last. Meghan Swiber, senior US rates strategist at BofA, said the bond market’s current stability relied on a “tenuous balance” of subdued inflation expectations and Treasury’s reliance on shorter-maturity issuance, which has helped keep supply concerns in check.

If inflation surges and the Fed turns hawkish, she said, Treasuries could lose their diversification appeal, rekindling demand concerns.

The reliance on T-bills to fund the deficit also has risks, and some sources of demand such as stablecoins are volatile.

Stephen Miran, the head of the White House Council of Economic Advisers who is currently serving as a Fed governor, criticized the Biden administration last year for the same approach Bessent is taking now: leaning on T-bills to fund the deficit. Miran argued at the time that it meant the government was piling up short-term debt that it might have to refinance at much higher costs if interest rates suddenly spike.

When reached for comment, Miran, who as Fed governor has been voting for the central bank to aggressively cut rates, declined to comment beyond referring Reuters to a September speech in which he forecast that national borrowing would decline.

Stephen Douglass, chief economist of NISA Investment Advisors, said the currency depreciation and spike in yields in the aftermath of Trump’s April tariff announcement was something that’s typically seen only in emerging markets, and it spooked the administration.

“It has been a meaningful constraint,” Douglass said.

(Reporting by Davide Barbuscia; Additional reporting by Vidya Ranganathan; Editing by Paritosh Bansal and Daniel Flynn)