NEW YORK (Reuters) – Since President Donald Trump’s “Liberation Day” tariffs sent U.S. bond markets into revolt in April, his administration has carefully calibrated policies and messaging to prevent another outbreak. But some investors say the truce remains fragile.
On Nov. 5, the Treasury said it was considering selling more long-term debt, a reminder of this vulnerability. The same day, the Supreme Court began hearing arguments over the legality of Trump’s sweeping trade tariffs. Benchmark 10-year bond yields have fallen sharply this year, surging more than 6 basis points — one of the biggest gains in recent months.
With markets already jittery about the size of the U.S. federal deficit, the Treasury proposal stoked concerns among some investors about upward pressure on long-term bond yields. At the same time, the Supreme Court case has raised doubts about a major source of revenue to repay the $30 trillion in government debt held by the market.
Citigroup analyst Edward Acton called the moment a “reality check” in a daily report on Nov. 6.
Reuters spoke to more than a dozen bank and asset manager executives who oversee trillions of dollars in assets, who said that amid relative calm in bond markets in recent months, a battle of wills is playing out between the government and investors concerned about persistently high U.S. deficits and debt levels.
Reflecting those concerns, the so-called “term premium” — the extra yield investors need to hold U.S. Treasuries for 10 years — has begun rising again in recent weeks.
“The bond market’s ability to intimidate governments and politicians is second to none, and you’ve seen that in the U.S. this year,” said Daniel McCormack, head of research at Macquarie Asset Management, referring to the bond crash in April that forced the government to revise plans for tariff hikes.
McCormack said failing to address pressures on public finances could create political problems in the long term as voters “continue to be disappointed with the government’s performance”.
Treasury Secretary Scott Bessent, a former hedge fund manager, has repeatedly said he is focused on driving down yields, especially on the benchmark 10-year bond, which affects everything from the federal government deficit to the cost of borrowing for households and businesses.
“As Treasury secretary, my job is to be the nation’s top bond salesman. Treasury yields are a powerful barometer of the success of that effort,” Bessant said in a Nov. 12 speech, noting that borrowing costs are falling across the curve. The Treasury Department did not respond to a request for comment for this report.
This public information and behind-the-scenes interactions with investors have convinced many in the market that the Trump administration is serious about reining in yields. Data showed some canceled bets over the summer that bond prices would fall after the Treasury Department proposed increasing purchases under an ongoing buyback program aimed at improving market functioning.
The Treasury Department is also discreetly soliciting investor input on major decisions, which one person familiar with the matter described as “proactive.”
In recent weeks, the Treasury Department has consulted with bond investors on the five candidates for the Fed chairmanship, asking how the market would react to them, this person said. They were told it would have a negative reaction to National Economic Council Director Kevin Hassett because he was not seen as independent enough from Trump.
Some investors have said they believe the Trump administration is simply buying itself time by taking these steps and that peace risks in bond markets remain as the U.S. still needs to finance an annual deficit of about 6% of GDP.
Governments are curbing bond vigilantes — investors who punish government profligacy by pushing up yields — but only just so far, these market experts say.
Investors say price pressures from tariffs, the bursting of AI-led market bubbles and the prospect of an overly easing Fed pushing up inflation could upset the equilibrium.
“Bond vigilantes are never going away. They’re always there; it’s just a matter of whether they’re active,” said Sinead Colton Grant, chief investment officer at Bank of New York Wealth Management.
vigilantes watching
White House spokesman Khush Desai told Reuters the government is committed to ensuring financial markets are sound and healthy.
“Many actions taken by this administration have strengthened confidence in the U.S. government’s finances and reduced the 10-year Treasury yield by nearly 40 basis points over the past year, including reducing waste, fraud and abuse in runaway government spending and curbing inflation,” he said.
Bond markets have a history of punishing fiscally irresponsible governments, sometimes resulting in politicians losing their jobs. Lately, in Japan, Prime Minister Takaichi Sanae has been trying to keep bond investors happy while trying to advance her agenda.
As Trump begins his second term, several indicators bond traders are watching are flashing red lights: Total U.S. government debt accounts for more than 120% of annual economic output. These concerns intensified after Trump imposed huge tariffs on dozens of countries on April 2.
Bond yields – which move opposite to prices – had their biggest weekly gain since 2001 as bonds sold off along with the dollar and U.S. stocks. Trump backed down, delaying the tariffs and eventually imposing them at a lower rate than he originally proposed. He praised the bond market as “beautiful” as yields retreated from what he described as troubling moments.
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 level in four years. On the surface, the bond vigilantes appear to have fallen silent.
A signal to the bond market
Investors say one reason for the silence is the resilience of the U.S. economy, with massive AI-led spending offsetting the drag on growth from tariffs and the Federal Reserve in easing mode as the job market slows; another is the Trump administration’s signal to markets that it doesn’t want yields to spiral out of control.
On July 30, the Treasury Department said it was expanding its repurchase program to reduce the amount of long-term, illiquid debt outstanding. The purpose of buybacks is to make it easier to trade bonds, but with the focus of the expansion being on 10-, 20- and 30-year bonds, some market participants are wondering whether this is an effort to cap those yields.
The U.S. Treasury Borrowing Advisory Committee, a group of traders who advise the agency on debt, said there was “some debate” among its members about whether it could be “misinterpreted” as a way to shorten the average maturity of outstanding U.S. government bonds. Some investors are concerned that the Treasury Department will take unconventional measures, such as an aggressive buyback program or reducing the supply of long-dated bonds, to cap yields, the person said.
Data shows that as these discussions took place over the summer, short positions – bets that long-term Treasury bond prices will fall and yields will rise – fell. Short positions in bonds with remaining maturities of at least 25 years fell sharply in August. They have been picking up over the past few weeks.
“We are in an era of financial repression, with governments using a variety of tools to artificially limit bond yields,” said Jimmy Chang, chief investment officer of Rockefeller Global Family Office, a division of Rockefeller Capital Management, which manages $193 billion.
The Treasury Department has also taken other steps to support markets, such as relying more on short-term borrowing of Treasury bills to fund deficits rather than increasing the supply of longer-term bonds. It also called on bank regulators to make it easier for banks to buy Treasuries.
JPMorgan analysts estimate that the supply of U.S. government debt issued to the private sector with maturities of more than one year will fall next year compared with 2025, even if the U.S. budget deficit is expected to remain roughly unchanged.
Demand for Treasury bills is also expected to get a boost. The Fed has ended its balance sheet reduction, which means it will once again become an active buyer of bonds, especially short-term debt.
The Trump administration’s embrace of cryptocurrencies has created a new and important buyer of this type of debt — stablecoin issuers.
Bessent said in November that the stablecoin market, worth about $300 billion, could grow tenfold by the end of the decade, increasing demand for Treasury bills.
“I feel like there’s less uncertainty in the bond market; it’s just that supply and demand are more balanced,” said Ayako Yoshioka, director of portfolio advisory at Wealth Improvement Group. “It’s a little weird, but so far it’s working.”
The question for many market participants, however, is how long this can last. Meghan Swiber, senior U.S. rates strategist at Bank of America, said the bond market’s current stability relies on a “fragile balance” between subdued inflation expectations and the Treasury’s reliance on short-term debt issuance, which helps keep supply concerns in check.
If inflation surges and the Fed becomes hawkish, Treasuries could lose their diversification appeal, reigniting demand concerns, she said.
There are also risks in relying on Treasury bills to fund deficits, and some sources of demand, such as stablecoins, are unstable.
Stephen Millan, a current Fed governor and chairman of the White House Council of Economic Advisers, last year criticized the Biden administration for taking the same approach Bessant is taking now: relying on the national debt to finance the deficit. Milan argued at the time that this meant the government was accumulating short-term debt that it might have to refinance at a higher cost if interest rates suddenly spiked.
When reached for comment, Millan, who as a Fed governor has voted for the central bank’s deep rate cuts, declined to comment other than to mention to Reuters that in a speech in September he predicted a decline in national borrowing.
Stephen Douglass, chief economist at NISA Investment Advisors, said that after Trump announced the tariffs in April, currency depreciations and spikes in yields typically seen only in emerging markets spooked governments.
“That’s a meaningful limit,” Douglas said.
(Reporting by Davide Barbuscia; Additional reporting by Vidya Ranganathan; Editing by Paritosh Bansal and Daniel Flynn)
