Trump vs. the Bond Market: A Battle for Economic Control

One of the biggest concerns about Donald Trump’s economic policies was the possibility that he might pressure the Federal Reserve into cutting interest rates, potentially undermining its independence. So far, that fear has not materialized. Instead, Trump has taken on an even greater challenge: convincing investors that market-driven interest rates should decline.

His administration has focused on reducing the yield on ten-year Treasury bonds, a crucial benchmark for corporate bonds, mortgages, and other financial instruments. On February 25th, the yield hit its lowest level since mid-December. A victory for Trump? Not quite.

The Bond Market’s Reality Check

The Trump administration’s reasoning is straightforward. The Federal Reserve’s decisions on interest rates affect overnight borrowing costs, but long-term Treasury yields, particularly the ten-year yield, hold more significance for businesses and consumers. These yields are influenced by broader economic factors, including long-term growth expectations, inflation, government fiscal policies, and global demand for U.S. debt—elements far beyond the Fed’s immediate control.

For Trump and his team, this raises two critical questions. First, how much influence does the White House actually have over long-term yields? Treasury Secretary Scott Bessent has suggested that reducing energy costs and easing regulations could help bring down yields. However, such changes would be incremental at best and unlikely to produce the sweeping impact the administration desires.

The second, and perhaps more pressing, question is whether Trump’s focus on bond yields will give the market even greater power to shape his policy agenda. Trump has shown sensitivity to stock market movements—February’s brief equity selloff, for instance, likely played a role in his decision to delay tariffs on Canadian and Mexican imports. Now, by publicly emphasizing bond yields, he has elevated the fixed-income market to a similar level of influence. Even Elon Musk, often aligned with Trump’s disruption-focused economic narrative, has claimed that yields will fall as his cost-cutting measures take effect—an assertion many economists find dubious.

The Market as an Enforcer

Bond markets have long acted as a check on political leaders. Bill Clinton’s strategist James Carville famously quipped that he’d like to be reincarnated as the bond market because it “can intimidate everybody.” By drawing more attention to bond yields, Trump, Bessent, and Musk have only reinforced this reality. Michael Medeiros of Wellington, a leading asset manager, says he now has “a lot more conviction” than before Trump’s election that the bond market will play a major role in shaping the administration’s economic policies.

Early signs suggest the bond market is already exerting pressure. In the two months following Trump’s victory, ten-year Treasury yields climbed by half a percentage point to 4.8%, the highest in over a year. This spike was fueled by both optimism about growth and concerns over fiscal deficits. If Trump were to deliver on his promised tax cuts, federal revenue could shrink by as much as $11 trillion over the next decade—equivalent to 3% of GDP—according to the Committee for a Responsible Federal Budget, a non-partisan watchdog group. Such a scenario would exacerbate America’s already serious fiscal challenges.

As Congress works to craft tax legislation, it has become evident that these cuts will be far more limited than originally promised. On February 19th, Trump endorsed a proposal from House Republican leaders that would cap tax reductions at $4.5 trillion over the next decade—less than half of his initial target. While further legislative negotiations remain, the contours of the plan are clear: Trump’s sweeping tax-cut agenda is being scaled back.

Limits to Trump’s Economic Gambits

The bond market may also act as a brake on some of the administration’s more radical ideas. Stephen Miran, Trump’s nominee to chair the Council of Economic Advisers, suggested in a November paper that the U.S. could compel foreign governments to exchange shorter-term Treasuries for century bonds as a way to ease the national debt burden. If implemented, this would effectively constitute a forced restructuring of American debt—something investors would not take lightly. Sonal Desai of Franklin Templeton, a major asset manager, warns that even the mere suggestion of such a policy could provoke strong pushback from bond markets. For now, she dismisses the proposal as being “somewhere between clickbait and hysteria.”

The immediate concern for both investors and the Trump administration is why bond yields have dropped over the past month—particularly their sharp decline in the past week. Trump had hoped to engineer a scenario of strong economic growth paired with disinflation, a combination that could buoy stock markets while keeping yields low. Instead, signs of economic weakness have emerged. Consumers are anxious about potential tariffs, and the administration’s once-grand tax cuts now seem unlikely to materialize.

This outcome is far from what Trump envisioned. The bond market, once an indirect force in shaping economic policy, is now a formidable constraint on his ambitions.