The US Treasury market is "walking a tightrope"! The Trump administration is striving to lower yields, but beneath the surface calm, hidden currents are surging.

Since US President Trump declared a "liberation day" in early April, announcing massive tariffs on trade partners which led to turmoil in the US bond market, the Trump administration has been cautiously adjusting its policies and external statements to prevent further market turmoil. However, some investors express that this "ceasefire" status is still very fragile. This fragility was evident on November 5th. On that day, the US Treasury hinted at considering increasing the issuance of long-term bonds. On the same day, the US Supreme Court began deliberations on the legality of Trump's large-scale trade tariffs. The benchmark 10-year US Treasury yield, which had significantly decreased earlier this year, rose over 6 basis points that day, marking one of the largest single-day increases in recent months. Against the backdrop of market concerns about the size of the US federal fiscal deficit, the Treasury's proposal sparked worries among some investors about upward pressure on long-term bond yields. The case in the US Supreme Court also raised doubts in the market about an important source of revenue used to pay off the $30 trillion government debt held by the market - tariffs. Citigroup analyst Edward Acton referred to this point as a "reality check" in a daily report on November 6th. A survey of over a dozen bank and asset management executives revealed that respondents believe there is a power struggle happening between the US government and investors concerned about the US's long-term high deficit and debt levels, beneath the surface calm of the bond market in recent months. Reflecting these concerns, so-called "term premiums" - the additional yield investors demand for holding a 10-year US Treasury bond - have started to rise again in recent weeks. Daniel McCormack, head of research at Macquarie Asset Management, said, "The bond market is uniquely powerful at intimidating governments and politicians, and you have seen that in the US this year." He referred to the bond market sell-off in April, which forced the government to soften its tariff increase plans. He added that in the long term, if public financial pressures are not resolved, continued disappointment from voters about government performance could lead to political issues. US Treasury Secretary Benson has stated multiple times that his focus is on lowering yields, especially on the benchmark 10-year US Treasury, as this affects various aspects from the federal deficit to household and corporate borrowing costs. Benson stated in a speech on November 12th, "As Treasury Secretary, my job is to be the nation's top bond salesman, and the Treasury yield is an important indicator of this work." He also noted that overall borrowing costs on the yield curve have decreased. This public stance and private interactions with investors have led many in the market to believe that the Trump administration is indeed taking the control of US bond yields seriously. Data shows that after the Treasury proposed expanding a continuous repo program aimed at improving market operations, some investors unwound positions betting on bond price declines in the summer. The Treasury has also discreetly consulted investors on major decisions, with one insider describing this approach as "proactive." The insider mentioned that in recent weeks, the Treasury had discussions with bond investors about the five candidates for the Federal Reserve chair position, asking about potential market reactions. Investors were informed that if White House economic advisor Kevin Hassett were to be appointed, the market reaction might be negative due to his perceived close relationship with Trump. Bond vigilantes' watchful eyes Several investors believe that the Trump administration's actions are merely buying time for themselves. With the US still needing to finance an annual deficit of about 6% of GDP, there are still risks to the "peace" in the bond market. These market participants argue that the government has barely suppressed the "bond vigilantes" - investors who punish fiscal recklessness by pushing up yields - but only just. Investors note that price pressure from tariffs, a market bubble burst driven by artificial intelligence (AI), and the prospect of inflation rising due to the overly accommodative Federal Reserve could all disrupt the current balance. Sinead Colton Grant, Chief Investment Officer at New York Mellon Bank Wealth Management, stated, "The bond vigilantes never disappear, they are always there. The key is whether they are active." White House spokesperson Kush Desai stated that the US government is committed to ensuring the stability and health of the financial markets. He said, "Cutting waste, fraud, and abuse in out-of-control government spending and curbing inflation are among many measures taken by this administration to boost confidence in the US government's fiscal situation, which has lowered the 10-year bond yield by almost 40 basis points over the past year." The bond market has historically punished fiscally irresponsible governments, sometimes leading to politicians losing their positions. As Trump enters his second term, several indicators monitored by bond traders have raised concerns - the US government debt has exceeded 120% of annual economic output. On April 2nd, following Trump's imposition of high tariffs on dozens of countries, bond trader concerns quickly escalated. Due to the inverse relationship between bond prices and yields, the bond yield saw its largest weekly increase since 2001, with the US dollar and stocks falling in tandem. Trump eventually chose to back down, delaying the imposition of tariffs, and the final tax rates were lower than initially proposed. As yields retreated from what he called a "disgusting" moment, he praised the bond market as being "beautiful." Since then, the 10-year US Treasury yield has fallen by over 30 basis points, and an index measuring bond market volatility recently hit its lowest level in four years. Sending signals to the bond market Superficially, the bond vigilantes seem to have quieted down. Investors suggest that one reason for this silence is the resilience of the US economy. Massive AI-driven investments have offset the drag on growth from tariffs, while a slowing job market has prompted the Federal Reserve to cut rates. Another reason is that the Trump administration has taken a series of measures to signal to the market that they do not want US bond yields to spiral out of control. On July 30th, the US Treasury announced an expansion of a repo program to reduce illiquid long-term debt in circulation. The program was intended to enhance bond trading liquidity, but as the focus of the expanded repo centered on the 10-year, 20-year, and 30-year bonds, some market participants questioned whether this was an attempt to suppress yields on those bonds. The Treasury Borrowing Advisory Committee - a group of traders advising the Treasury on debt issues - said there was "some debate" among its members about whether this practice could be "misunderstood" as shortening the average maturity of US debt. Some investors are concerned that the Treasury may resort to unconventional methods, such as aggressive repo programs or reducing long-term bond supply, to limit yield increases. During the summer discussions, short positions on long-term US bonds decreased. In August, short positions on US bonds with remaining maturities of at least 25 years decreased significantly, but in recent weeks they have started to increase again. Jimmy Chang, Chief Investment Officer at Rockefeller Global Family Office, which manages $193 billion in assets under Rockefeller Capital Management, said, "We are in an era of financial repression, where the government is using various tools to artificially suppress bond yields." He described this as an "unsettling balance." The Treasury has also taken other measures supporting the market, such as relying more on short-term Treasury bills for deficit financing rather than increasing long-term bond supply, while also calling on bank regulators to ease regulations, making it easier for banks to buy US government bonds. Analysts at JPMorgan estimate that even though the US fiscal year 2026 budget deficit is expected to be similar to 2025, the supply of US government debt issued to the private sector with maturities over one year is expected to decrease next year. Demand for Treasury bills is also expected to receive a boost. The Federal Reserve has ended balance sheet reduction, indicating that they will once again become active buyers in the bond market, especially in short-term debt. Additionally, the Trump administration's embrace of cryptocurrencies has created a new significant buyer of US bonds - stablecoin issuers. Benson stated in November that the current $300 billion stablecoin market could grow tenfold by the end of the decade, significantly increasing demand for Treasury bills. Ayako Yoshioka, Portfolio Consulting Director at Wealth Enhancement Group, said, "I feel that the uncertainty in the bond market has decreased, and the supply-demand balance is just trending towards equilibrium. It's a little strange, but it seems to be working so far." How long can the fragile balance be maintained? However, many market participants are concerned about how long this state can be maintained. Meghan Swiber, Senior US Rate Strategist at Bank of America, stated that the stability of the bond market currently relies on a "fragile balance" - on one hand, mild inflation expectations, and on the other hand, the Treasury's increasing reliance on short-term debt issuance, which suppresses supply-side concerns. She pointed out that if inflation spikes and the Federal Reserve shifts to a hawkish stance, US bonds may lose their appeal as a risk diversifier, and demand concerns could resurface. There are also risks in relying on Treasury bills for deficit financing, and some demand sources, including stablecoins, have inherent volatility. Milan, current Chairman of the White House Economic Advisory Committee and also a Federal Reserve Board member, had criticized the Biden administration last year for adopting a strategy similar to Benson's - relying on Treasury bills for deficit financing. Milan believed that this approach meant the government was accumulating short-term debt, which could lead to higher refinancing costs if interest rates suddenly spike. However, Milan declined to comment further on last year's views, only mentioning in a speech in September that he predicted the national borrowing scale would decrease. Stephen Douglass, Chief Economist at NISA Investment Advisors, stated that the currency devaluation and yield spikes following Trump's tariff announcement in April are typically seen only in emerging markets, which has made the government uneasy, "This has become a significant constraint."