Bessent criticized tactic that could lower 10-year yield, according to analysts
The Trump administration could potentially lower 10-year Treasury yields by selling fewer of them, a strategy that was previously criticized as market manipulation, according to Deutsche Bank Securities strategists. Treasury Secretary Scott Bessent emphasized a focus on the 10-year Treasury to reduce borrowing costs, rather than the Federal Reserve’s overnight interest rate. Despite the rate being below its late 2023 peak of 5%, the current rate of around 4.5% remains higher than any point since 2007.
Deutsche Bank’s Matthew Raskin, Matthew Luzzetti, and Steven Zeng explained that government influence over Treasury yields is limited to actions that impact supply or demand in the bond market. One practical approach suggested is reducing the supply of long-maturity Treasury fixed-rate securities relative to short-term bills. This method could decrease the net Public-sector supply of duration, putting downward pressure on term premia and potentially leading to lower yields. This approach was identified as one of the most feasible steps the government might take to achieve its goal.
The strategists acknowledged that such a move would be significant, especially considering that Bessent and other administration officials had opposed this tactic during the previous year’s presidential campaign. Criticisms were raised regarding the decision in late 2023 to slow long-maturity auction sizes and increase short-maturity debt sales to potentially benefit the economy before the election. Bessent and others had accused then-Treasury Secretary Janet Yellen of significantly easing financial conditions, suggesting that the administration manipulated investors’ interest rate risk to lower 10-year yields by a quarter percentage point. However, in their initial communications with investors, the new administration maintained Yellen’s guidance on Treasury auction sizes for the near future.
Despite expectations of increased auction sizes later in the year, the decision not to alter guidance signaled a cautious approach to Treasury issuance under Bessent’s leadership, as outlined by the Deutsche Bank report. Additional methods proposed to reduce long-term Treasury yields include more improbable measures such as making Treasuries tax-exempt or implementing short-term strategies such as marking the Fed’s balance sheet’s gold to market value.
Another viable option suggested is regulatory changes allowing banks to exclude Treasuries from industry risk ratio calculations, with Federal Reserve Chair Jerome Powell expressing support for this change. While this sparked performance improvements for Treasuries compared to interest-rate swaps, analysts at Deutsche Bank anticipated limited impact on broader US rates from this change.
