In a recent statement, U.S. Treasury Secretary Scott Bessent outlined the Trump administration’s objective to reduce borrowing costs across the economy by lowering the yield on the 10-year Treasury note. During an interview with Fox Business, Bessent emphasized their focus on the 10-year Treasury, clarifying, “He is not calling for the Fed to lower interest rates.”
The significance of the 10-year yield, often referred to as the risk-free rate, lies in its influence on a variety of long-term loans, including mortgages and business loans. A decrease in the 10-year yield typically encourages borrowing and investment, fostering an environment conducive to economic growth and risk-taking in financial markets.
This presents a potentially bullish scenario for risk assets, including cryptocurrencies such as Bitcoin (BTC). By targeting a reduction in the yield through inflation control measures, Trump’s administration aims to create favorable conditions for BTC, while also working towards alleviating the budget deficit, which may present challenges for risk assets.
Bessent highlighted that energy supply dynamics are critical indicators for long-term inflation expectations, asserting that boosting energy production could significantly contribute to lowering inflation rates.
Lower inflation, when coupled with already restrictive Federal Reserve (Fed) policies, could pave the way for further rate cuts. The Fed has notably reduced its benchmark borrowing cost by 100 basis points since September, now standing at a 4.25%-4.5% range.
Addressing the budget deficit is another cornerstone of Bessent’s strategy. By curtailing fiscal spending, the administration seeks to mitigate bond supply, resulting in higher bond prices and lower yields. However, contrasting fiscal approaches under the Biden administration have raised questions about the sustainability of this strategy. Elevated federal spending has so far counterbalanced high Fed rates, potentially leading to instability in risk assets, including cryptocurrencies, if spending is curtailed.
ForexLive’s Chief Asia-Pacific Currency Analyst, Eamonn Sheridan, remarked on the implications of the need for significant changes to the fiscal landscape, questioning if Trump’s plans would indeed materialize in a politically feasible manner.
Market Reactions and Future Outlook
As markets currently price in lower energy prices and non-inflationary growth, the 10-year yield has already decreased by 38 basis points, settling at 4.42%. However, analysts at ING express skepticism regarding the durability of this decrease. They predict a potential floor just under 4% for the 10-year yield, asserting that a significant driver for further reductions is yet to be identified.
ING concluded their analysis by suggesting that any substantial dip in the 10-year yield would necessitate a significant accomplishment from the newly formed Department of Government Efficiency (DOGE), aimed at curtailing wasteful fiscal expenditures. As the fiscal landscape remains uncertain, stakeholders in risk assets are advised to remain cautious.
