The US bond market is “walking a tightrope”! The Trump administration is struggling to reduce yields, and undercurrent surges amid apparent calm

The Zhitong Finance App learned that since US President Trump announced large-scale tariffs on trading partners on the so-called “Liberation Day” in early April, causing turmoil in the US bond market, the Trump administration has been carefully adjusting its policies and external statements to prevent further market turmoil. However, some investors say this “truce” is still very fragile.

This vulnerability was once again revealed on November 5. On the same day, the US Treasury hinted that it was considering increasing the issuance of long-term treasury bonds. On the same day, the US Supreme Court began debating the legality of Trump's large-scale trade tariffs. The benchmark 10-year US Treasury yield — which has declined sharply since this year — jumped more than 6 basis points on the same day, making it one of the biggest one-day gains in recent months.

Against the backdrop that the market is already uneasy about the size of the US federal fiscal deficit, the Treasury Department's proposal has raised concerns among some investors about upward pressure on long-term treasury bond yields. Meanwhile, the US Supreme Court case raised doubts about an important source of revenue — that is, tariffs — to repay the $30 trillion government debt held by the market. Citigroup analyst Edward Acton called this point “a reality test” in a November 6 daily report.

According to a survey of more than a dozen bank and asset management agency executives, interviewees believe that under the apparent calm of the bond market over the past few months, a game of will between the US government and investors worried about America's long-term high deficits and high debt levels is actually going on. Reflecting these concerns, the so-called “term premium” — the additional yield required by investors to hold 10-year US bonds — has begun to rise again in recent weeks.

Daniel McCormack, head of asset management research at Macquarie, said: “The bond market is unrivaled in its ability to frighten governments and politicians, and you've seen this in the US this year.” He meant that the bond market plummeted in April, which forced the government to ease plans to raise tariffs. He added that in the long run, if the pressure on public finance is not addressed, it may cause political problems as voters “continue to be disappointed” with the results of the government's administration.

US Treasury Secretary Bessent has stated many times that his focus is on reducing yields, especially the benchmark 10-year US Treasury yield, because this will affect everything from federal government deficits to household and business borrowing costs. In a speech on November 12, Bezent said, “As Minister of Finance, my job is to be the top bond salesman in the country, and treasury yield is an important indicator for measuring this work.” He also pointed out that the overall cost of borrowing on the yield curve has declined.

This kind of public statement and private interaction with investors made many people in the market believe that the Trump administration is indeed taking the issue of controlling US bond yields seriously. The data shows that after the Ministry of Finance proposed expanding a continuous repurchase program aimed at improving the operation of the market, some investors settled their previous positions betting on falling bond prices in the summer.

The Ministry of Finance also asked investors for their views on major decisions in a low-key manner. One person familiar with the matter described this approach as “proactive.” The source said that in recent weeks, the Treasury Department has communicated with bond investors about the five candidates for the Federal Reserve Chairman's election to inquire about possible market reactions. Investors have been told that if National Economic Council Director Kevin Hassett takes office, the market reaction may be negative because he is considered too close to Trump.

The attention of the Bond Volunteer Police

A number of investors say they think the Trump administration's moves are just buying time for themselves. With the US still having to finance an annual deficit of about 6% of GDP, the “peace” of the bond market is still at risk. These market sources said that the government has now narrowly suppressed the “bond police” — that is, punishing investors who are financially indulgent by boosting yields, but only marginally.

Investors say that the price pressure brought about by tariffs, the bursting of the market bubble driven by artificial intelligence (AI), and the prospect that excessive easing of the US Federal Reserve may boost inflation may all upset the current balance. Sinead Colton Grant, Chief Investment Officer of Wealth Management at Bank of New York Mellon said, “The Bond Volunteers will never disappear; they have always been there. The only thing that matters is whether they're active.”

White House spokesman Kush Desai said the US government is committed to ensuring the stability and health of the financial market. He said, “Cutting waste, fraud and abuse in uncontrolled government spending and curbing inflation is one of many steps taken by the current administration. These actions have boosted market confidence in the US government's fiscal position and lowered 10-year Treasury yields by nearly 40 basis points over the past year.”

The bond market has historically penalized fiscally irresponsible governments, and sometimes even made politicians lose their jobs. When Trump began his second term, several bond traders were watching a red light — total US government debt had exceeded 120% of annual economic output.

On April 2, after Trump imposed high tariffs on dozens of countries, bond traders' concerns quickly heated up. Due to the inverse relationship between bond prices and yields, bond yields showed the biggest weekly increase since 2001, and the US dollar and US stocks also fell at the same time. Subsequently, Trump chose to back down and delay the implementation of tariffs, and the final tax rate was lower than initially proposed. As yields receded from what he called a “disgusting” moment, he praised the bond market for being “beautiful.” Since then, the 10-year US Treasury yield has fallen by more than 30 basis points, and an indicator that measures the volatility of the bond market recently fell to its lowest level in four years.

Sending a signal to the bond market

On the face of it, the bond volunteer police seem to have run out of steam. Investors say one reason for this silence is the resilience of the US economy. Large-scale investment driven by AI has offset the drag on growth from tariffs, while the slowing job market has prompted the Federal Reserve to cut interest rates. Another reason is that the Trump administration has taken a series of steps to signal to the market that it does not want US bond yields to get out of control.

On July 30, the US Treasury said it would expand a buyback program to reduce long-term, illiquid debts in circulation. The plan was intended to improve the convenience of bond transactions, but since the focus of expanding repurchases is on 10-year, 20-year, and 30-year treasury bonds, some market participants suspect it is an attempt to suppress the yield on US bonds with these maturities.

The US Treasury Borrowing Advisory Committee — a group of traders providing debt advice to the Treasury — said there was “some controversy” among its members about whether the practice could be “misunderstood” as shortening the average maturity period of US Treasury bonds. According to the person familiar with the matter mentioned above, some investors are worried that the Ministry of Finance may adopt unconventional measures, such as aggressive repurchase plans or reducing the supply of long-term treasury bonds, to limit the rise in yield.

The data shows that during these discussions in the summer, shorting positions on long-term US debt declined. In August, US debt short positions with at least 25 years remaining were drastically reduced, but have begun to increase again in the past few weeks.

Jimmy Chang, chief investment officer of the Rockefeller Global Family Office, which manages $193 billion in assets and is affiliated with Rockefeller Capital Management, said, “We are in an age of financial suppression, where the government uses various tools to artificially reduce bond yields.” He called it an “unsettling equilibrium.”

The US Treasury has also taken other measures to support the market, such as relying more on short-term treasury bills (T-bills) to finance deficits rather than increasing the supply of long-term treasury bonds. At the same time, it also called on banking regulators to relax regulations to make it easier for banks to buy US Treasury bonds. J.P. Morgan analysts estimate that even if the US budget deficit for the 2026 fiscal year is expected to be roughly the same as the 2025 fiscal year, the supply of US government debt issued to the private sector next year and maturing for more than one year will still decline.

Demand for treasury bills is also expected to be boosted. The Federal Reserve has ended balance-sheet contraction, which means it will once again become an active buyer of the bond market, particularly short-term debt. Furthermore, the Trump administration's embrace of cryptocurrencies has spawned a new major buyer of treasury bonds — stablecoin issuers. In November, Bezent said that the current stablecoin market of about 300 billion US dollars may grow tenfold by the end of this decade, thereby significantly increasing demand for treasury bills.

Ayako Yoshioka, Director of Portfolio Advisory at Wealth Investments Group, said, “I feel that the bond market is less uncertain; there is only a more balanced trend between supply and demand. It's a bit odd, but it's worked so far.”

How long can a fragile balance last?

However, many market participants are concerned about how long this state of affairs can last. Meghan Swiber, a senior US interest rate strategist at Bank of America, said that the stability of the current bond market depends on a “fragile balance” — on the one hand, moderate inflation expectations, and on the other hand, the Treasury relies more on short-term debt issuance, thus suppressing supply-side concerns. She pointed out that if inflation soars and the Federal Reserve turns hawkish, US debt may lose its risk-spreading appeal, and demand concerns will resurface. Relying on treasury bills to finance budget deficits is also risky, and some sources of demand, including stablecoins, are themselves volatile.

Milan, the current chairman of the White House Council of Economic Advisers and also the governor of the Federal Reserve, criticized the Biden administration last year for adopting a similar approach to Bezent's today — relying on treasury bills to finance the deficit. Milan believed at the time that this meant that the government was accumulating short-term debt, and once interest rates suddenly soared, it might be necessary to refinance at a higher cost. However, Milan now declined to comment further on last year's views, mentioning only that in a speech in September, he predicted a decline in the size of the country's borrowing.

Stephen Douglass, chief economist at NISA Investment Advisors, said that currency depreciation and soaring yields that occurred after Trump announced tariffs in April usually only occurred in emerging markets. This situation made the government uneasy. “This has become an important restraining factor.”