Can the Treasury Secretary lower long-term Treasury yields?

Investment Analysis Clubs Macro Economic Trends and Risks
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Treasury Secretary Scott Bessent wants to bypass the Fed to lower interest rates

By Bryan Mena and Elisabeth Buchwald, CNN, Thu February 6, 2025

Treasury Secretary Scott Bessent has a new plan in the fight to bring down historically high interest rates, and it’s got nothing to do with the Federal Reserve.

Bessent, in two interviews this week, said the Trump administration wants to focus on lowering long-term interest rates, which are largely influenced by the yield on the 10-year US Treasury note. The Fed’s decisions, on the other hand, have a more direct effect on short-term interest rates, which control borrowing costs for Americans. …

“[President Trump] is not calling for the Fed to lower rates,” Bessent told Fox Business on Wednesday. Instead, he said, the Trump administration is focused on lowering the 10-year Treasury yield. “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,” he said. … [end quote]

That’s a lot of ifs. I don’t disagree with the statement necessarily but there are a lot more moving parts, such as the budget that Congress passes. (Assuming they get their act together to actually pass a budget.)

Treasury can change the balance of the duration of borrowing to fund deficit spending and service interest on the (existing and expanding) debt. If Treasury moves the average duration out (which they should have done big-time when real yields were negative) the demand for long-term bonds will rise, driving up the price and driving down the yield. But that would lock the Treasury debt structure into relatively high real yields for a long time.

Note that Bessent is not saying he can lower the 10YT yield directly the way the Fed lowers the fed funds rate by printing fiat money. If he tried the entire financial system would spiral into hyperinflation. (It’s been done before.) He is focusing on changes to lower the deficit, such as lower spending.

Wendy

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Mom, really, give me the keys to the car and I will win a drag race and use the winnings to replace the burnt out tires with new extra wides, win some more races(!), and then buy us a new house, and my schooling and Dad and my noisy pregnant ex-girlfriend will all take care of themselves somehow, vanishing, and we can spend the rest of our lives eaating hamburgers and thinking about walking on the beach……

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Energy prices affect inflation and inflation affects long-term interest rates.

“We find a strong connection between oil prices and long-run nominal interest rates which has lasted throughout the entire postwar period.”

DB2

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Ignoring Total Real Costs, insisting to everyone that only governmentally subsidized market costs matter, correlates strongly with losing almost everything of value while shrieking that you paid full asking price fair and square and only “afterwards” was you robbed.

I am profitting mightly from my Oil and Gas investments, but
(warning, moralistic brag coming down the pike God forgive me) (as with most of my income these days)
I am pouring all my petro income into protection for sexually non-conformist kids (now idiotically labeled GBTQxxx as opposed to just KIDS), anti-idiot (uselessly labeled anti-Fascist) political movements, and scholarships for brilliant but impoverished Mexican kids from the countryside.

I want interest rates to reflect the real cost of capital rathet than the manipulated political needs of whoever, and I want the USA government to spend money where most valuable and necessary.

I am so screwed.

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Only congress can lower the deficit, treasury secretary cannot. We all know that, including him. There are lot of things he says, but what really matters is…

treasury decided not to change the issuance schedule, size, term composition at least for next 2 quarters.

Before taking office, he riled against Yellen for issuing so much bills and not enough long term debt. I was surprised by that rant. Because the outstanding treasury bills to debt ratio is consistent with the past, and the bills to money market funds also consistent. If we cut the bills then money market goes to hell and we will have liquidity crisis.

None of this is news or requires special insight, even an idiot like me knows it. Yet, their rhetoric is…

The expectation that deficit is suddenly going to come crashing down is inconsistent with the reality and if the deficit comes down along with that US economy will also crash.

Trump and co is determined to break something, until something breaks badly they wont’ calm down.

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What was the interest rate when Paul A. Volcker became the Fed Chairman? :imp:

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History is only four decades old, give or take… :innocent:

The Captain

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That’s a good question - are current rates “historically high” or “historically normal” or close to normal?

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Depends on the economy. Raygun allowed a major worldwide recession under his watch. GHWB had a recession in 1991. Boom times under Clinton. GWB allowed 9/11 to happen (extended recession) and then another major recession as a result of KNOWN failed economic policies. The US moved OUT of recession under Obama, who re-established demand-side economics, driving the US economy to record highs AND employment. TIG was unable to do much until he allowed Covid-19 to kill millions of people, including 1+million Americans–costing him the 2020 election. His choices killed off too many conservative voters who refused vaccines, thus reducing the number of his supporters who could vote (dead people don’t vote–then again…). His choices put the US into a major recession for 2+yrs. Biden continued Obama’s policies, driving the US economy AND employment to further record highs (even with the Boomer retirements in full progress). By cutting communication between information agencies and the public, TIG is setting the stage for a second major nationwide medical emergency AND another economic crash.

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@MarkR I once dug the data out of the Federal Reserve database to calculate the REAL yield of the 10 year Treasury by subtracting the inflation rate from the 10 YT yield.

Over a period of decades before 2000, the average real yield of the 10YT was 2.3%.

Today, the Fed predicts the January 2025 CPI to be 2.85%. The current 10YT yield is 4.25% so the real yield is 1.4%. The 2035 Jan 15 TIPS yield is 2.0% (plus the inflation adjustment, of course).

The current 10YT rate is significantly lower than the historical average – before QE. To say that long-term Treasury yields should be lower is to ignore history and desire to go back to the ultra-low yields of QE which were emergency actions in response to crises and should never have lasted this long.

This chart shows the Fed’s outrageous expansion of the money supply (suppressing the long-term yields by buying long-term Treasuries) which had never happened before in U.S. history.

Wendy

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There are a lot of ifs, not all in the US.

Debt brake reform in Germany is not a certainty, but it’s gaining momentum. If only we had a really wealthy loudmouth to influence economic policy decisions in Germany…

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I think better question is the current “real rates” are they high or normal or below normal. We are having “real returns” now on the 10 year, remember post GFC, FED artificially suppressed the real rates, thus punishing the savers and pushed them towards “risky assets”, one of the goals of QE.

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