The Trump administration reiterates the "third mandate" of the Federal Reserve, will the US bond market undergo changes?

In the eyes of generations on Wall Street, it has always been an obvious fact that the Federal Reserve has a "dual mandate" of maintaining price stability and achieving full employment. This mandate determines the way it sets interest rates, and from Alan Greenspan to Jerome Powell, this principle has been followed repeatedly. Therefore, when Stephen Mian, the new Federal Reserve Board nominee nominated by Trump, mentioned a third goal - that the Federal Reserve must also "maintain moderate long-term rates," analysts began to explore its significance and potential impact. In fact, Mian's mention of the "third mandate" belongs to the Federal Reserve's traditional third goal in a sense. Andrew Brenner, head of international fixed income at NatAlliance Securities, said the significance of this move to financial markets is obvious - and worrisome because it could disrupt portfolios. Brenner believes that Mian, known for his role in the Mar-a-Lago Agreement and newly become a Fed official, mentioning the "third mandate" in congressional testimony is the clearest signal yet that the Trump administration intends to use monetary policy to influence long-term bond yields and use the central bank's charter as a shield. This also highlights Trump's efforts to break decades of institutional norms to undermine the Fed's long-standing independence, serving his own goals. Brenner wrote in a report on September 5th, "The Trump administration 'discovered this clause in the original documents of the Fed, which is not clearly articulated, it allows the Fed to have a greater impact on long-term rates.' This is not the current trading strategy, but indeed something worth considering." Such policy has not been implemented yet, and there is currently no need for such policies as yield rates on U.S. bonds of all maturities are gradually declining to the lowest levels of the year, and the worsening job market is paving the way for further interest rate cuts by the Federal Reserve. In addition, in the near term, the "third mandate" is more seen as a natural result in the process of controlling inflation management. However, some investors have stated that they are already fully considering the possibility of taking action when evaluating the bond market. While some other investors warned that if taking non-traditional measures to limit long-term rates becomes part of the policy gradually, it may have adverse effects, especially on inflation, making debt management and the Fed's work more challenging. While the process of setting the Federal Reserve's short-term target interest rates is often closely watched, what determines the level of interest payments on tens of trillions of dollars of mortgages, corporate loans, and other debt for the American people is actually the longer-term U.S. Treasury bond yields set in real-time by traders around the world. U.S. Treasury Secretary Benson often emphasizes the importance of long-term rates to the U.S. economy and the issue of housing costs. Like Mian, Benson in a recent commentary cited the Fed's three statutory goals and criticized the central bank's "overreach". Impact on Portfolios George Catrambone, head of the Americas fixed income department at Deutsche Bank, said a trigger that may prompt action could be a situation where even with multiple rate cuts by the Fed, long-term rates continue to stay high. Catrambone said: "Whether the funds come from the Treasury or are supported by the Fed or both, they will eventually come together to achieve this goal, and this feedback mechanism will eventually kick in." Over the past few months, he has been converting maturing short-term U.S. Treasury bonds into 10-year, 20-year, and 30-year bonds, acknowledging that this is a contradictory position to the mainstream view. Possible measures mentioned in the bond market, aimed at lowering or at least restricting longer-term rates, include: the issuance of more short-term bonds by the U.S. Treasury and increased repurchase operations for longer-term bonds. Further measures would involve the central bank buying bonds as part of quantitative easing, although Benson has detailed the negative effects he believes the Fed's past quantitative easing policies have brought. However, the Treasury Secretary supports implementing quantitative easing in "truly emergency situations". Another option is for the Treasury and the Fed to work together on their balance sheets to absorb longer-term bond issuances. Although this possibility has become very remote at the moment, once final buyers intervene and cap rates, it will undoubtedly increase the risk of betting on a downturn in the long-term bond market, at least to some extent. Daniel Ivascyn, Chief Investment Officer at The Pacific Investment Management Company, said: "If a less independent Federal Reserve decides to restart quantitative easing, you will incur significant losses in terms of the yield curve; or if the Treasury Department is more aggressive in managing the yield curve, this will also be the case." This bond giant still has an underweighting position in long-term bonds, but has already taken profits from positions in short-term securities that have been beneficial to its best performing funds this year. The current context does not favor the "third goal" The Trump administration's efforts to lower long-term rates will repeat past situations, especially during and after World War II. As early as the early 1960s, the Fed implemented "twist operations" aimed at lowering long-term rates while keeping the volume of short-term bonds issuance constant. At the height of the global financial crisis, the Fed began large-scale purchases of mortgage assets, and later expanded it to U.S. Treasuries, aimed at lowering long-term rates and stimulating the economy. By 2011, the Fed introduced another form of "twist operation". Compared to the earlier quantitative easing policy, the scale was much smaller. During the COVID-19 pandemic, the Fed purchased a large amount of corporate bonds, a much larger scale than at any other time. Gary Richardson, economics professor at the University of California, Irvine and a Fed historian, said: "In the past, the Fed has indeed done what Trump is trying to do now, and Congress has allowed the Fed to do so." But this mainly happened during wartime or economic crisis. He said: "These situations no longer apply now. We are not in a major war, nor are we experiencing a severe economic recession. Now, just like Trump wants to do." If the U.S. Treasury and the Fed take more aggressive measures to try to lower long-term rates, it may backfire, especially in the case of persistently high inflation levels above the target, as institutions like Carlyle Group have warned. The prospect of the Trump administration pushing for further economic development through more stimulus measures led the 10-year U.S. Treasury yield to reach its peak of 4.8% in January. From a broader perspective, there is also a question of how to define "moderate long-term rates." From a historical perspective, the current 10-year U.S. Treasury bond yield is close to 4%, even at its high this year, it is still well below the average of 5.8% since the early 1960s. Data shows that there is no need to take any special policy measures in this situation. Mark Spindel, Chief Investment Officer at Potomac River Capital, said, "For a number, what exactly 'moderate' means is indeed difficult for me to define, but it's a bit like a 'Goldilocks' situation. We neither set it too high nor too low." For Spindel, the ambiguity in expressing medium to long-term rates means that this level of rates may be used as a "legitimate reason for almost anything". He said he is buying short-term U.S. Treasury inflation-protected securities (TIPS) to hedge against the risks of the Fed losing its independence in case it becomes politicized, so that he can "have protection against inflation". As the government's deficit continues to swell, lowering rates across the entire yield curve will help reduce the cost of financing the increasing debt burden. According to collected data, as of September 9th, the total U.S. national debt has reached $37.4 trillion. The latest budget bill extending Trump's tax cuts is expected to keep the U.S. budget deficit above 6% of GDP. Benson, following the example of former U.S. Treasury Secretary Yellen, is trying to increase the sales of short-term bonds while keeping the sales of long-term bonds stable, at the same time stating that the current yield levels are not conducive to taxpayers selling long-term bonds. Vineer Bhansali, founder of LongTail Alpha asset management company, said: "Debt and debt servicing costs are constraints on the government, they have to take measures to address this issue, but they cannot intervene at the fiscal level. So they have to take action at the Fed level, because that's the only viable way right now. And now, the Treasury Secretary manipulating long-term rates closer to low levels is inevitable." Bhansali said that for those who are concerned about accelerating inflation, this risk seems to be one that the government is willing to take. "The Fed will eventually act in line with the wishes of the president and the Treasury department - even if it means higher levels of inflation."