U.S. Treasury Secretary Scott Bessent said Wednesday that the Trump administration aims to reduce borrowing costs in the economy by lowering the yield on the 10-year Treasury note.
“He and I are focused on the 10-year Treasury,” Bessent told Fox Business when asked about plans to lower interest rates. “He is not calling for the Fed to lower interest rates,” Bessent added.
The 10-year yield, the so-called risk-free rate, influences most long-term loans in the economy, including mortgages and business loans. Thus, a declining 10-year yield encourages borrowing and investment, increasing risk-taking in the economy and financial markets.
Thus, softening of the 10-year yield is typically seen as bullish for risk assets, including bitcoin (BTC). Trump plans to lower the yield by controlling inflation, which will likely bode well for BTC and reducing the budget deficit, which may be a headwind for risk assets.
“The energy component for them is one of the surest indicators for long-term inflation expectations,” Bessent said, reiterating that boosting the energy supply will help lower inflation.
Other things being equal, lower inflation would allow the Federal Reserve (Fed) to continue cutting rates, which are still very much in restrictive territory. That could add to the bullish momentum in risk assets. Since September, the Fed has lowered the benchmark borrowing cost by 100 basis points to 4.25%-4.5% range.
Meanwhile, Bessent’s strategy to inject downward pressure on the 10-year yield also involves fixing the huge budget deficit through reduced fiscal spending. Deficit reduction would mean less bond supply, higher bond prices, and lower yields.
That said, the Biden administration’s supposed out-of-control fiscal spending compensated for the elevated Fed rates and greased financial markets. So, any cut in spending could destabilize risk assets, including cryptocurrencies.
“Of course, getting the 10-year yield on a downward path implies moves to improve the U.S. fiscal position, as well as inflation. So far, we’ve had his partner, Musk, cutting Federal government programs like USAID, Federal employees and such. Which really doesn’t scratch the surface, ” ForexLive’s Chief Asia-Pacific Currency Analyst Eamonn Sheridan noted.
“Most of the U.S. spending is on healthcare, Social Security, and defence. Will Trump inflict the pain that his focus seems to imply? There is a barely a politician out there that would,” Sheridan added.
Enjoy the move lower while it lasts
The 10-year yield has dropped by 38 basis points to 4.42% as markets price in lower energy prices and non-inflationary growth, according to Bessent.
Analysts at ING, however, do not see a sustained drop.
“We also assert there is not huge room to the downside for the 10 year yield. An effective floor is in place at just under 4%, as determinable from the funds rate strip. That floor can, of course, shift lower, but would need a better reason than an approaching 10 year rate. And the 10 year Treasury yield sits some 50bp over this. So enjoy the move lower while it lasts,” ING said in a note to clients.
ING added that it’s hard to see a big driver for a lower 10-year yield, apart from a potential huge success of The Department of Government Efficiency, or DOGE, created to cut wasteful fiscal expenditure and slash federal regulations.
U.S. 10-year yield. (TradingView)
