Since President Donald Trump’s "Liberation Day" tariffs triggered a revolution in the US bond market last April, the Trump administration has carefully adjusted its policies and messaging to prevent another upheaval. However, according to some investors, the truce remains fragile. This fragility became evident on November 5, when the Treasury Department hinted it was considering selling more long-term debt. On the same day, the Supreme Court began hearing arguments regarding the legality of Trump’s extensive trade tariffs. Benchmark 10-year bond yields, which had decreased sharply this year, rose by more than 6 basis points—one of the largest increases in recent months.
Concerns regarding the deficit
With the market already anxious about the size of the US federal deficit, the Treasury’s proposal sparked fears of upward pressure on long-term bond yields. The Supreme Court case, meanwhile, raises doubts about a significant revenue source intended to service the government’s $30 trillion debt held by the market. Citigroup analyst Edward Acton described the situation as "a reality test" in a daily report on November 6.
Reuters spoke with more than a dozen directors at banks and asset managers overseeing trillions of dollars in assets; they noted that beneath the apparent calm of the bond market in recent months, a battle of wills is unfolding between the administration and investors worried about persistently high levels of US deficit and debt. Reflecting these fears, the so-called "term premium"—the extra yield investors demand to hold 10-year US debt—has begun to rise again in recent weeks. "The ability of the bond market to terrify governments and politicians is unsurpassed, and we saw that in the US this year," said Daniel McCormack, head of research at Macquarie Asset Management, referring to the April bond collapse that forced the administration to moderate its tariff hike plans.
Public finance risks
Following these events, the failure to resolve pressures on public financing could create political issues as voters become "consistently disillusioned with government efficiency," McCormack noted. Treasury Secretary Scott Bessent—a former hedge fund manager—has repeatedly stated he is focused on keeping yields low, especially for the benchmark 10-year bond, which affects borrowing costs for the state as well as for households and businesses.
"As Treasury Secretary, my job is to be the country's top bond salesman. And bond yields are a powerful indicator of success in this task," Bessent stated in a speech on November 12, noting that borrowing costs decreased across the yield curve. This public communication and behind-the-scenes interaction with investors have convinced many in the market that the Trump administration is serious about keeping yields under control. Some investors reversed bets this summer that bond prices would fall after the Treasury proposed increasing purchases through a buyback program aimed at improving market functionality.
Reactions to administration strategy and potential risks
Nevertheless, some investors believe the Trump administration has merely bought time with these steps. With the US still needing to finance an annual deficit of around 6% of GDP, risks to the "silent peace" in the bond market remain. The Treasury Secretary is keeping "bond vigilantes"—investors who punish government profligacy by driving up yields—at bay, but only with difficulty, according to market experts. Pressure from tariffs, the slaughter of an AI-driven market bubble, and the prospect of an overly accommodative Federal Reserve policy that might drive up inflation could tip the balance, investors say.
The silence of the "bond vigilantes"
White House spokesperson Kush Desai told Reuters that the administration is committed to ensuring healthy and stable financial markets. "Reducing waste, fraud, and abuse in government spending and fighting inflation are some of the actions of this administration that have strengthened confidence in US government finances and reduced 10-year bond yields by nearly 40 basis points over the past year," he stated. The history of bond markets shows that governments acting with fiscal irresponsibility are often punished with increased yields, sometimes until their politicians are ousted.
Uncertain future
While current bond market stability depends on a "fragile" combination of low inflation expectations and the Treasury's reliance on short-term bonds to finance the deficit, it remains uncertain how long this balancing act will last. Increased demand for short-term bonds, debt management through T-bills, and geopolitical concerns make the future uncertain for US bond markets.
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