Watch out for interest rates.
Not the short-term rates controlled by the Federal Reserve. Barring an unforeseen financial crisis, they’re not going anywhere, especially not after the jump in inflation reported by the government on Wednesday.
Instead, pay attention to the 10-year Treasury yield, which has been bouncing around since the election from about 4.8 to 4.2 percent. That’s not an unreasonable level over the last century or so.
But it’s much higher than the 2.9 percent average of the last 20 years, according to FactSet data. At its upper range, that 10-year yield may be high enough to dampen the enthusiasm of many entrepreneurs and stock investors and to restrain the stock market and the economy.
That’s a problem for the Trump administration. So the new Treasury secretary, Scott Bessent, has stated outright what is becoming an increasingly evident reality. “The president wants lower rates,” Mr. Bessent said in an interview with Fox Business. “He and I are focused on the 10-year Treasury.”
Treasuries are the safe and steady core of many investment portfolios. They influence mortgages, credit cards, corporate debt and the exchange rate for the dollar. They are also the standard by which commercial, municipal and sovereign bonds around the world are priced.
What’s moving those Treasury rates now is bond traders’ assessments of the economy — including the Trump administration’s on-again, off-again policies on tariffs, as well as its actions on immigration, taxes, spending and much more.
Mr. Bessent, and President Trump, would like those rates to be substantially lower, and they’re trying to talk them down. But many of the president’s policies are having the opposite effect.
The president needs the bond market on his side. If it comes to disapprove of his policies, rates will rise and the economy — along with the fortunes of the Trump administration — will surely suffer.
Treasuries, not Fed Rates
Mr. Bessent may be focusing on Treasury rates, or yields, partly to relieve pressure on the Federal Reserve, which President Trump frequently berated in his first term and on the campaign trail.
The Fed’s independence is sacrosanct among most economists and many investors. During the campaign, Mr. Trump repeatedly called on the Fed to lower rates. Yet any threat to the Fed’s ability to operate freely could panic the markets, which, clearly, is not what Mr. Trump wants.
To the contrary, when the markets are strong, he frequently cites them as a barometer of his popularity. In 2017, he boasted about the performance of the stock market an average of once every 35 hours, Politico calculated.
Shortly after the November election, I wrote that the markets might restrain some of Mr. Trump’s actions. But I wouldn’t go too far with this now. Few government departments or traditions seem to be off limits for the administration’s aggressive changes in policy or reductions in work force, masterminded by Mr. Trump’s sidekick, the billionaire disrupter-in-chief, Elon Musk. Just look at The Times’s running tabulation of the actions taken since Jan. 21. It’s dizzying.
Still, so far, at least, the administration has been remarkably circumspect when it comes to the Fed. That doesn’t mean President Trump has entirely constrained himself: He has continued to mock the Fed, saying in a social media post that it has “failed to stop the problem they created with Inflation” and has wasted its time on issues like “DEI, gender ideology, ‘green’ energy, and fake climate change.”
Nonetheless, Mr. Bessent said specifically that Mr. Trump “is not calling for the Fed to lower rates.” Instead, the Treasury secretary said, “If we deregulate the economy, if we get this tax bill done, if we get energy down, then rates will take care of themselves and the dollar will take care of itself.” The president has not contradicted him. So far, trying to control the Fed is a line that Mr. Trump hasn’t yet crossed. The bond market is another matter.
Longer-Term Rates
Treasury rates haven’t usually garnered the big headlines frequently devoted to the Federal Reserve.
The Fed is easier to explain. When it raises or lowers short-term rates, it’s clear that somebody took action and caused a measurable change.
In reality, when we report that the Fed is cutting or increasing rates, we mean that it is shifting its key policy rate, the federal funds rate. That’s what banks charge one another for borrowing and lending money overnight. It’s important as a signal — a red or green light for stock traders — and “it influences other interest rates such as the prime rate, which is the rate banks charge their customers with higher credit ratings,” according to the Federal Reserve Bank of St. Louis. “Additionally, the federal funds rate indirectly influences longer- term interest rates.”
What causes shifts in longer-term rates is much harder to pinpoint because they are set by an amorphous force: the market, with Treasuries at the core. Day to day, you won’t hear much about it unless you’re already a bond maven.
How does any market set prices? Supply and demand, the preferences of buyers and sellers, trading rules — the textbooks say these and other factors determine market prices. That’s true for tangible things like milk, eggs, gasoline, a house or a car. Treasury prices — and those of other bonds, which use Treasuries as a reference — are more complicated. They include estimates of the future of interest rates, of inflation and of the Fed’s intentions.
The Fed sets overnight rates, which are involved indirectly in bond rates for a simple reason. The interest rate for a 10-year Treasury reflects assumptions about many, many days of overnight rates, chained together until they span the life of whatever bond you buy. Inflation matters because when it rises more quickly than anticipated, it will reduce the real value of the stream of income you receive from standard bonds.
That happened in 2022. Inflation soared and so did yields, while bond prices, which move in the opposite direction, fell — creating losses for bond funds and for individual bonds sold under those conditions.
That’s why the increase in inflation in January, to an annual rate of 3 percent for the Consumer Price Index from 2.9 percent the previous month, immediately pushed up the 10-year Treasury yield, which stands above 4.5 percent. Trump administration policies are weighing on bond prices and yields, too.
Mr. Bessent has pointed out that oil prices are a major ingredient in inflation and, therefore, bond yields. But whether Mr. Trump will be able to bring down oil prices by encouraging drilling — while eliminating subsidies and regulations that encourage the development of energy alternatives — is open to question.
Some Trump policies being sold as promoters of economic growth — like cutting regulations and tax rates — could have that effect. But others, like reducing the size of the labor force — which his deportations of undocumented immigrants and restrictions on the arrival of new immigrants will do — could slow growth and increase inflation.
So could the tariffs that he has been threatening, delaying and, in some cases, already imposing. Expectations for future inflation jumped in the University of Michigan’s monthly survey in January. Joanne Hsu, the survey’s director, said that reflects growing concerns about the Trump tariffs among consumers.
“These consumers generally report that tariff hikes will pass through to consumers in the form of higher prices,” she wrote. She added that “recent data show an emergence of inflationary psychology — motives for buying-in-advance to avoid future price increases, the proliferation of which would generate further momentum for inflation.”
None of that augurs well for the 10-year Treasury yield. Nor does a warning issued by five former Treasury secretaries — Robert E. Rubin, Lawrence H. Summers, Timothy F. Geithner, Jacob J. Lew and Janet L. Yellen — who served in Democratic administrations.
They wrote in The New York Times that incursions of Mr. Musk’s cost-cutting team into the Treasury’s payment system threaten the country’s “commitment to make good on our financial obligations.” They applauded Mr. Bessent for assuring Congress in writing that the Treasury will safeguard the “integrity and security of the system, given the implications of any compromise or disruption to the U.S. economy.”
But they decried the need for any Treasury secretary to have to make such promises in his first weeks in office.
Other potential flash points for Treasury yields loom. The Fed has in the past manipulated the market bond supply by buying and selling securities. It’s reducing its holding now, which could put upward pressure on interest rates — and make the Fed an irresistible Trump target. At the same time, Secretary Bessent is financing the government debt mainly with shorter-term bills but may not be able to avoid increasing the supply of longer-term Treasuries indefinitely, as the federal deficit swells. Yet Congress is reluctant to raise the debt ceiling, which will bite later this year.
These are difficult times. So far, the 10-year yield hasn’t shifted all that much. The markets, at least, have been holding steady.