NEW YORK, Dec 29 (Reuters) – After President Donald Trump’s ‘Liberation Day’ tariffs sent the U.S. bond market into a tailspin in April, his administration has carefully tailored its policies and messaging to prevent another flareup. But the truce remains tenuous, some investors say.
A reminder of that fragility came Nov. 5 when the Treasury Department considered selling more long-term debt. The same day, the Supreme Court began hearings debating the legality of Trump’s sweeping trade tariffs. The benchmark 10-year bond yield, which has fallen sharply this year, rose more than 6 basis points — one of the biggest jumps in recent months.
With markets already uneasy about the size of the US federal deficit, the Treasury proposal sparked 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 $30 trillion pile of government debt in 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 from banks and asset managers that oversee trillions of dollars in assets, who said that beneath the relative calm in the bond market in recent months, a battle of wills has been playing out between the administration and investors worried about persistently high U.S. deficits and debt levels.
Reflecting those concerns, the so-called “term premium” — the extra yield investors demand for holding U.S. debt for 10 years — has begun to rise once again in recent weeks.
“The bond market’s ability to scare 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 April’s bond crash that forced the administration to shelve plans for a tariff hike.
In the long term, failure to address the strain on public finances could create political issues as voters “continue to be frustrated with government delivery,” McCormack said.
Treasury Secretary Scott Besant – 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 bond salesman. And Treasury yields are a strong barometer for measuring success in that effort,” Bessant said in a Nov. 12 speech, citing falling borrowing costs. 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 that the Trump administration is serious about reining in production. Some unwind bets over the summer that bond prices will fall after the Treasury offers increased purchases under an ongoing buyback program to improve market performance, data show.
The Treasury has also carefully sought investors’ views on key decisions, with one person familiar with the matter describing them as “active”.
In recent weeks, the Treasury consulted with bond investors on five candidates for the role of Federal Reserve chairman, asking them how the market would react, the person said. They were told it would reflect negatively on Kevin Hassett, director of the National Economic Council, because he is not considered independent enough from Trump.
Many investors said they believe the Trump administration is simply buying time with such moves and, given that the U.S. still needs to finance an annual deficit of about 6 percent of GDP, there are risks to stability in bond markets.
The administration has kept bond vigilantes — investors who punish government neglect by raising yields — at bay, but only just, these market experts said.
Price pressures from tariffs, the bursting of an artificial intelligence-led market bubble and the prospect of an overly accommodative Fed pushing inflation higher could all upset the balance, investors say.
“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.
Vigilantes are watching
White House spokesman Kush Desai told Reuters the administration remains committed to ensuring strong and healthy financial markets.
“Reducing waste, fraud, and abuse in runaway government spending and cooling inflation are among the many actions of this administration that have boosted confidence in U.S. government finances and lowered the 10-year Treasury yield by 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. Recently, in Japan, Prime Minister Sane Takaichi has been busy keeping bond investors happy while trying to push his agenda.
When Trump began his second term, several indicators watched by band traders were glowing red: Total US government debt was more than 120% of annual economic output. Those concerns grew after April 2 when Trump imposed massive tariffs on dozens of countries.
Bond yields – which move inversely to prices – saw their biggest weekly rise since 2001, as bonds sold off alongside the dollar and US stocks. Trump backtracked, delaying the tariffs and eventually implementing them at lower rates than initially proposed. While yields retreated from what he described as an awkward moment, he hailed the bond market as “beautiful.”
Since then, the 10-year Treasury yield has fallen more than 30 basis points, and a measure of bond market volatility recently fell to its lowest in four years. On the surface, it would seem that bond alerts are muted.
Signals in the bond market
One reason for the silence, investors said, is the resilience of the U.S. economy, with big AI-led spending offsetting the drag on growth from tariffs, and the Fed on easy mode as the job market slows; Another is the steps taken by the Trump administration to signal to markets that it does not want runaway yields.
On July 30, the Treasury said it was expanding a buyback program that would reduce the amount of long-dated, liquid debt outstanding. The buybacks are meant to make the bands easier to trade, but because the expansion was focused on 10-, 20- and 30-year bonds, some market participants wondered if it was an attempt to cap those yields.
The Treasury Borrowing Advisory Committee, a group of traders that advises the agency on debt, said there was “some debate” among its members that it could be “misinterpreted” as a way to shorten the average maturity of outstanding US government bonds. A person familiar with the matter said some investors are concerned that the Treasury may take unconventional steps, such as an aggressive buyback program or reducing the supply of long-dated bonds, to limit yields.
As these discussions continued over the summer, short positions — bets on long-dated Treasury bond prices falling and yields rising — declined, the data show. Short bets against bonds with at least 25 years remaining to maturity fell sharply in August. They have been backing up in the last few weeks.
“We’re in an era of financial repression, with governments using various tools to artificially keep bond yields a lid,” 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 toward short-term borrowing through Treasury bills to fund the deficit rather than increasing the supply of longer-dated bonds. It also called on banking regulators to make it easier for banks to buy Treasury bonds.
JPMorgan analysts estimate that while the US budget deficit is expected to remain roughly unchanged, the supply of US government debt issued to the private sector with maturities of more than one year to 2025 will decline next year.
Demand for T-bills is also expected to get a boost. The Fed has ended its balance sheet rundown, meaning it will again be an active buyer of bonds, especially short-dated debt.
And the Trump administration’s embrace of cryptocurrencies has created a new significant buyer of such debt — stablecoin issuers.
Besant said in November that the stablecoin market, worth about $300 billion, could grow tenfold by the end of the decade, fueled by growing demand for Treasury bills.
“I think there’s less uncertainty in the bond market; there’s more parity 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 this can last. Meghan Swiber, senior US rates strategist at BofA, said the bond market’s current stability hinges on a “weak balance” of low inflation expectations and the Treasury’s reliance on short-maturity issuance, which has helped keep supply concerns in check.
If inflation rises and the Fed becomes hawkish, she said, Treasuries could lose their diversification appeal, rekindling demand concerns.
Reliance on T-bills to fund deficits also has risks, and some sources of demand, such as stablecoins, are volatile.
Stephen Miran, head of the White House Council of Economic Advisers, who currently serves as the Fed governor, criticized the Biden administration last year for what Bessant is now taking on: a penchant for T-bills for deficits. Miran argued at the time that this meant the government had piled up short-term debt that it might have to refinance at a much higher cost if interest rates suddenly rose.
Reached for comment, Miran, who as Fed governor has been voting for the central bank to aggressively cut rates, declined to comment to Reuters without referring to a September speech in which he predicted a decline in national borrowing.
Stephen Douglas, chief economist at NISA Investment Advisors, said the currency devaluation and rise in yields following Trump’s April tariff announcement is something typically seen only in emerging markets, and it spooked the administration.
“It’s been a meaningful hurdle,” Douglas said.
(Reporting by David Barbuscia; Additional reporting by Vidya Ranganathan; Editing by Paritosh Bansal and Daniel Flynn)
