NEW YORK, Dec 29 (Reuters) – Since President Donald Trump’s “Deliverance Day” tariffs sent the U.S. bond market into turmoil in April, his administration has carefully tailored its policies and messaging to prevent another crisis. 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 on the legality of Trump’s high trade tariffs. Yields on the benchmark 10-year bond, which have fallen sharply this year, rose more than 6 basis points — one of the biggest gains in months.
With the market already jittery about the size of the US federal deficit, the Treasury proposal raised fears among some investors about upward pressure on long-term bond yields. The Supreme Court case, meanwhile, has raised doubts about a major source of revenue to service the $30 trillion pile of market-held government debt.
Citigroup analyst Edward Acton called the moment “a reality check” in a Nov. 6 daily report.
Reuters spoke to more than a dozen executives from banks and asset managers who oversee billions of dollars in assets, who said that beneath the relative calmness of bond markets in recent months is a battle of wills between the administration and investors concerned about persistently high levels of the U.S. deficit and debt.
Reflecting those concerns, the so-called “term premium” — the extra return investors demand to hold U.S. debt for 10 years — has started to rise again in recent weeks.
“The ability of bond markets to terrorize governments and politicians is second to none and you’ve seen that in the US this year,” said Daniel McCormack, head of research at Macquarie Asset Management, referring to the bond crash in April that forced the administration to temper its rate hike plans.
In the long term, failure to resolve strains on public finances may create political problems as voters grow “increasingly disappointed with government delivery”, McCormack said.
Treasury Secretary Scott Bessent — a former hedge fund manager — has repeatedly said he is focused on keeping yields low, particularly 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 seller of bonds. And Treasury yields are a powerful barometer for measuring success in that endeavor,” Bessent said in a Nov. 12 speech, noting that borrowing costs have fallen along the curve. The Treasury did not respond to a request for comment for this story.
Such public messages and behind-the-scenes interactions with investors have convinced many in the market that the Trump administration is serious about keeping yields under control. Some bets were off over the summer that bond prices would fall after the Treasury proposed increasing purchases as part of an ongoing buyback program aimed at improving the functioning of the market, the data showed.
The Treasury has also quietly sought investor views on major decisions, with one person familiar with the matter describing them as “proactive”.
In recent weeks, the Treasury consulted with bond investors about five candidates for Federal Reserve chairman, asking how the market would react to them, the person said. They were told they would react negatively to Kevin Hassett, the director of the National Economic Council, because he is not perceived to be sufficiently independent of Trump.
Several investors said they believed the Trump administration was just buying time with such steps, and with the U.S. still having to finance an annual deficit of about 6 percent of GDP, risks remain for peace in the bond market.
The administration is keeping bond vigilantes — investors who punish government mismanagement by driving up yields — at bay, but only just, these market experts said.
Price pressures from tariffs, the bursting of an AI-driven market bubble and the prospect of an overly accommodative Fed pushing inflation higher could upset the balance, investors say.
“Bond watchdogs 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 VIGILANTS SEE
White House spokesman Kush Desai told Reuters the administration was committed to ensuring sound and healthy financial markets.
“Cutting waste, fraud and abuse in exempt government spending and reducing inflation are among the many actions of this administration that have increased confidence in the US government’s finances and lowered 10-year Treasury yields by nearly 40 basis points over 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 been grappling with keeping bond investors happy as she tries to push her agenda.
When Trump began his second term, several indicators watched by bond traders were flashing red: Total U.S. government debt was more than 120 percent of annual economic output. Those concerns erupted after April 2, when Trump imposed massive tariffs on dozens of countries.
Bond yields – which move inversely to prices – posted their steepest weekly rise since 2001 as bonds sold off alongside the dollar and US stocks. Trump pushed back, delaying the tariffs and ultimately imposing them at rates below those originally proposed. As yields pulled back from what he described as a nauseous moment, he hailed the bond market as “beautiful”.
Since then, 10-year Treasury yields have fallen more than 30 basis points, and a measure of bond market volatility recently fell to a four-year low. On the surface, bond watchers appear to have been silent.
SIGNALS FOR THE BOND MARKET
One reason for the silence, investors said, is the resilience of the U.S. economy, with massive AI-led spending offsetting the pace of growth from tariffs and with a Fed in easing mode due to a slowing labor market; another is the steps the Trump administration has taken that signal to the market that it does not want lost yields.
On July 30, the Treasury said it was expanding a buyback program that will reduce the amount of long-term illiquid debt. The buybacks are meant to ease bond trading, but because the expansion focused on 10-, 20- and 30-year bonds, some market participants wondered if it was an effort to cap those yields.
The Treasury Borrowing Advisory Committee, a group of traders that advises the agency on debt, said there was “a debate” among its members over whether it could be “misconstrued” as a way to shorten the average maturity of outstanding US government bonds. The person familiar with the matter said some investors are concerned that the Treasury is taking unconventional steps, such as an aggressive buyback program or reducing the supply of long-term bonds, to limit yields.
As those discussions played out over the summer, short positions — bets that long-term Treasury bond prices would fall and yields would rise — fell, the data showed. Short bets against bonds with at least 25 years to maturity fell sharply in August. They’ve been back for the past few weeks.
“We’re in this era of financial repression, governments using various tools to maintain an artificial cap 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 balance.”
The Treasury Department has also taken other steps to support the market, such as leaning more on short-term borrowing through Treasury bills to finance the deficit instead of increasing the supply of longer-term bonds. It also asked banking regulators to make it easier for banks to buy Treasury bonds.
JPMorgan analysts forecast that the supply of US government debt issued to the private sector with maturities greater than one year would decline next year from 2025, even as the US budget deficit is expected to remain roughly unchanged.
Demand for government bonds is also expected to get a boost. The Fed has finished unwinding its balance sheet, which means it will once again be an active buyer of bonds, especially short-term debt.
And the Trump administration’s adoption of cryptocurrencies has created a significant new buyer of such debt – stablecoin issuers.
Bessent said in November that the stablecoin market, valued at about $300 billion, could grow tenfold by the end of the decade, boosting demand for Treasuries.
“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, director of portfolio consulting at Wealth Enhancement Group. “It’s been a little weird, 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 current stability in the bond market rests on a “weak balance” of subdued inflation expectations and the Treasury’s reliance on shorter-dated issuance, which has helped keep supply concerns in check.
If inflation rises and the Fed becomes tighter, she said, Treasuries could lose their diversification appeal, reigniting concerns about demand.
Reliance on government securities to finance the deficit also has risks, and some sources of demand, such as stable currencies, are volatile.
Stephen Miran, the head of the White House Council of Economic Advisers who currently serves as Fed governor, criticized the Biden administration last year for the same approach Bessent is taking now: relying on Treasury bills to finance the deficit. Miran argued at the time that this meant the government was accumulating short-term debt that it might have to refinance at much higher costs if interest rates rose sharply.
When reached for comment, Miran, who as Fed governor voted for the central bank to cut interest rates aggressively, declined to comment beyond referring Reuters to a speech in September in which he predicted national borrowing would fall.
Stephen Douglass, chief economist at NISA Investment Advisors, said the depreciation of the currency and the rise in yields after Trump’s April tariff announcement was something usually only seen in emerging markets and spooked the administration.
“It was a significant constraint,” Douglass said.
(Reporting by Davide Barbuscia; Additional reporting by Vidya Ranganathan; Editing by Paritosh Bansal and Daniel Flynn)
