The stock market gets most of the attention, but the ten-year bond may be the market’s most important asset price. And while the stock market has fallen since Donald Trump’s inauguration, so has the ten-year, by about 25 basis points.
Lowering the ten-year yield—the return paid on a ten-year bond—which is up some 250 basis points since 2019, has been a White House priority because of the metric’s implications for capital markets and consumer credit. Whether its recent decline will endure, and whether that will materially benefit American consumers, depends on the administration’s policies.
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The ten-year yield is a cornerstone of the economy. When it’s low, borrowing becomes easier for consumers, and the government can service the national debt more affordably. The yield reflects macroeconomic conditions and how financial markets price risk, as it captures traders’ predictions about the debt market and inflation over the coming decade. After years of near-zero interest rates and low yields, the ten-year started rising after the pandemic—a shift that, following a long period of low rates, could cause disruptions across the economy.
Two key factors drive ten-year yields. The first is expectations of future inflation. The second is concerns about government debt—not necessarily because investors fear a U.S. default, but because they anticipate that the government will either issue more bonds to cover its obligations, pushing bond prices down, or resort to printing money to erode the debt’s real value. The return of inflation and rising government debt have, in turn, fueled the recent increase in the ten-year yield.
Yields have fallen in the past few weeks amid recession fears, but they remain high relative to markets’ recent experience. One way to bring the ten-year yield back to lower levels in the long run is actually to have a recession, because people are more likely to buy bonds in risky economic environments. A recession, of course, would not be great for American consumers. What good is a low mortgage rate when you have no money or job?
A more sustainable strategy for reducing yields—one the Trump administration is reportedly considering—is “encouraging” foreign debt holders to buy more long-duration bonds. Foreigners currently own about 23 percent of U.S. public debt, much of it short-term. Since many of their liabilities are pension- and retirement-related obligations with similarly long durations, they would likely benefit from holding more long-term debt. Shifting to later-maturing bonds would also lower yields across longer-duration securities, including the ten-year.
While this is one approach, the most effective way for the Trump administration to bring down the ten-year yield is to reduce the national debt and control inflation. This would send a strong signal of fiscal responsibility and bolster market confidence regarding future inflation and interest rates.
The Trump administration is right to focus on long-term bonds, but lowering yields sustainably requires understanding why they have risen in the first place—and addressing those underlying causes.
Photo by Anna Moneymaker/Getty Images
