Meet Trump's fiercest opponent: The bond market

Treasury yields are falling sharply. But not for the President's desired reasons. 

One of the biggest fears about Donald Trump’s approach to the economy was that he might try to undermine the Federal Reserve’s independence and press it to cut interest rates. So far that has not come to pass. Instead, he has set himself an even tougher challenge: persuading investors that market-determined rates should come down. Specifically, Mr Trump and senior members of his administration want to bring down the yield on ten-year Treasury bonds. On February 25th it fell to its lowest level since mid-December (see chart). All going to plan? Not quite.

The Trump administration’s logic is straightforward. When the Fed decides to lower rates, what it is actually doing is reducing its target for overnight borrowing costs. But for many actors in the economy, the ten-year yield is more important and tangible, because it serves as a benchmark for everything from corporate bonds to mortgages. And long-term yields respond to economic conditions more broadly—not just to the Fed’s short-term target.

For Mr Trump’s team the focus on long-term yields raises two questions. The first is how much ability the White House has to influence such yields. A range of variables feeds into bond pricing: long-run growth and inflation expectations, the economy’s productive potential and the government’s fiscal trajectory, which helps dictate the supply of and demand for its bonds. All are slow moving. Scott Bessent, the treasury secretary, has argued that the Trump administration can bring down yields by lowering energy prices and streamlining regulation. In reality, any such changes will be incremental.

The second question may matter more: will Mr Trump’s emphasis on yields make the bond market more potent as a check on his agenda? Much has been made of Mr Trump’s sensitivity to the stockmarket: a brief swoon in equities earlier in February probably contributed to his decision to delay tariffs on imports from Canada and Mexico. Now, though, he has also elevated the status of the bond market. Elon Musk, Mr Trump’s disrupter-in-chief, has done the same, saying that long-term yields will fall as his cost-cutting campaign bears fruit (a dubious claim).

Yields were always going to restrain Mr Trump, as they have done other leaders. James Carville, a strategist for Bill Clinton, famously quipped that he wanted to be reincarnated as the bond market so he could “intimidate everybody”. Yet the extra lip service paid to yields by Messrs Trump, Bessent and Musk has only cemented the market’s clout. Michael Medeiros of Wellington, an asset manager, says that he has “a lot more conviction” than he did before Mr Trump’s victory that the bond market will help to discipline his policies.

There is circumstantial evidence bonds may already be having an effect. In the two months after Mr Trump won, ten-year yields rose by half a percentage point to 4.8%, the highest in over a year. Optimism about growth was one driver; so was concern about the fiscal deficit. Were Mr Trump to deliver his promised tax cuts, he could shrink federal revenue by as much as $11trn over the next decade, or 3% of gdp, according to the Committee for a Responsible Federal Budget, a non-partisan group. That would exacerbate America’s already severe fiscal problems.

As Congress gets down to crafting tax laws, it has become evident that cuts will instead be curtailed. On February 19th Mr Trump voiced support for a “big beautiful bill” proposed by Republican leaders in the House of Representatives, which would cap cuts at $4.5trn over a decade. Although wrangling is still needed for legislation to make it through Congress and onto the president’s desk, the parameters are clear enough at this stage: Mr Trump’s tax-slashing plans are being watered down.

The bond market may also rebuff the wildest ideas batted about in the Trump world. Stephen Miran, Mr Trump’s nominee to chair his Council of Economic Advisers, wrote a paper in November in which he suggested that America could compel other governments to swap shorter-term Treasuries for century bonds as a way to alleviate its official debt burden. If such a policy was pursued, it would amount to a forced restructuring of American bonds. Sonal Desai of Franklin Templeton, another asset manger, says that even a hint that Mr Trump was seriously entertaining the proposal would bring out bond vigilantes. Until then, she dismisses it as “somewhere between clickbait and hysteria”.

For now, the most pressing concern for investors and Mr Trump himself is why yields have fallen in the past month, and sharply in the past week. The president had hoped to achieve robust growth and disinflation—a mixture that could help push up stocks and bring down yields. Instead, signs of economic weakness have emerged, with consumers worried about the threat of tariffs, and enormous tax cuts now look unlikely. That is very much not what Mr Trump had in mind.