By Eric Wallerstein
The Trump administration is focused on lowering the 10-year Treasury bond yield
Bessent believes that deregulation, reordered global trade, and lower government spending can pay for tax cuts.
The actions of U.S. Treasury Secretary Scott Bessent will be key to how the financial markets react to the Trump 2.0 economic agenda. Bessent would take a gradual approach to lowering the U.S. budget deficit and the U.S. dollar (DX00), mindful not to stir up market volatility.
As such, the dollar’s global dominance is not at risk, nor is the Federal Reserve’s independence. Investors can also relax about the Fed’s decision to slow its balance-sheet paring. It doesn’t represent monetary easing or the end of quantitative tightening. It’s just a practical measure to lift pressure on reserve balances and should barely affect Treasury yields.
Trump’s Treasury man: Since U.S. President Donald Trump took office two months ago, his economic team has been on the road making frequent media appearances. Between Bessent, Commerce Secretary Howard Lutnick and National Economic Council Director Kevin Hassett, there’s at least one media appearance a day.
The trio seems to be marketing Trump 2.0 to both Wall Street and Main Street. The bulk of their time is spent assuring that tariffs are a long-term net positive and that reversing what they call the Biden administration’s “disastrous” policies may require some pain, but that both are part of a broader economic strategy to achieve more sustainable, America-first growth.
Hassett is the only one of the three with extensive policy experience, including serving as the chair of the Council of Economic Advisers during Trump’s first term. So his views have been widely on display for some time. It remains to be seen how much sway Lutnick will hold in tariff negotiations that include U.S. Trade Representative Jamieson Greer, Secretary of State Marco Rubio, Bessent and Trump.
We have been focusing on trying to understand Bessent’s views. Bessent is a self-professed economic history buff, having taught the subject at his alma mater, Yale University, for several years despite holding only a bachelor’s degree. His motivation for leaving his hedge fund Key Square Group to join the Trump administration undoubtedly is the opportunity to help spearhead what aims to be the largest realignment of global trade in decades.
Bessent may need to tap novel Treasury policies to achieve Trump 2.0’s mandate of a weaker dollar and lower bond yields.
What Bessent says and does as Treasury secretary will be key to the markets’ reactions to Trump 2.0 for several reasons. First, the Treasury Department’s debt management strategy has gained outsized importance as the U.S. deficit and debt ostensibly near tipping points. Second, sanctions on Russian assets and their excommunication from the SWIFT international payments system may have hurt the dollar’s global status and elevated alternatives, as can be seen by gold’s (GC00) surge since 2022. Third, Bessent may need to tap novel Treasury policies to achieve Trump 2.0’s mandate of a weaker dollar and lower bond yields.
A few long-form interviews with Bessent – including earlier this month on “Face the Nation” and on the “All-In” podcast, which is hosted by Trump’s artificial-intelligence and crypto czar David Sacks and a few other venture capitalists – provide helpful insight into his views. They also help draw contrast to warnings by some in the financial media that the overarching economic plans are either doomed or lack cohesion.
‘Cheap goods’
Take a moment to consider some of the key takeaways regarding the economic policies of the next four years, and our spin on what they may mean for the financial markets.
1. Unsustainable: Bessent recently asserted that the American Dream is built on upward mobility and rising per-capita wealth and incomes, rather than the availability of “cheap goods.” This drew fire from across the political spectrum, particularly with tariffs threatening to raise goods prices.
But Bessent doubled down on his view, suggesting that unconstrained fiscal stimulus and overregulation led to record inflation for necessities and housing unaffordability. In his eyes, it’s no surprise that many Americans have been downbeat on the economy throughout the last few years, as real wages suffered despite strong reported economic growth. (In fact, the trend for real wages has been to the upside since 1995.)
2. Regulation: Bessent believes that bank regulation has prevented the private sector from leveraging up by preventing bank lending. Therefore, deregulation will help the private sector releverage and thus offset the negative growth impulse from government’s deleveraging as the fiscal deficit is reined in relative to GDP. With bank lending standards easing and the private credit market flush with cash, there’s certainly a lot of pent-up supply of dollars to lend.
A direct impact for bond yields is the supplementary leverage ratio, which basically is a capital charge to banks for buying risky assets, but that includes Treasury bills and bank reserves. Despite the success of excluding Treasurys and reserves during 2020, the charge was reimposed in March 2021. By excluding bills and reserves permanently, which Federal Reserve officials have also supported, Bessent supposes that bill yields could fall by 30 to 70 basis points (0.30% to 0.70%). That would help save the government a lot in interest costs and also steepen the yield curve closer to historical norms.
3. Tax cuts: Bessent believes that deregulation, reordered global trade and lower government spending can pay for tax cuts and, at least in theory, boost U.S. economic growth enough to increase total government revenue.
As a percentage of gross domestic product, government revenues did fall to 17% by the end of 2019 from 19% in the fourth-quarter of 2015. At the same time, the federal deficit grew to 4.6% of GDP in 2019 from 2.4% in 2015.
Bessent wants to lower the federal budget deficit slowly, noting that some deficit hawks do not realize that swift cuts would weigh unduly on economic growth. The goal of a fiscal deficit at 3% of GDP still has an uncertain time frame, so even moderate progress toward it is likely to be received favorably.
Century bonds: Much ado has been made in the financial media and on Wall Street about the administration’s goal of deliberately weakening the dollar by issuing century bonds and pursuing a so-called Mar-a-Lago Accord. This administration’s focus is on lowering the 10-year Treasury bond (TY00) yield as opposed to buoying the stock market, with Bessent likely spearheading this direction.
As part of the century-bond proposal, Bessent would convert foreign investors’ 5- and 10-year Treasurys into 100-year bonds, perhaps with a small withholding of interest payments (say, a percent or two of total coupon payments, not a full percentage point or two of yield). Nearly everything we’ve heard and read has been negative on this idea. Whether it will come to fruition remains to be seen. Most public responses have been quite critical. It’s also not clear why foreigners would cooperate with this scheme.
We do not think outright currency-depreciation measures will be taken until 2026 at the earliest. Tariffs, fiscal deficit reductions and the stick approach of forcing other countries to spend on their own defense obviously are indirect means of achieving a lower dollar. They are already under way but will take a lot of time to fully flesh out. Investors would be better served focusing elsewhere.
Whether the Fed can remain independent in a Trump 2.0 administration is a more pressing issue for the markets. But we aren’t too worried about this either: The idea of century bonds arguably underscores Trump 2.0’s commitment to Fed independence. In our view, perceived threats to the status quo of dollar dominance and Fed independence are overdone.
Foreign central banks and therefore economies depend on the New York Fed’s dollar-swap lines to shore up the U.S. dollar’s value during financial crises and dollar shortfalls. For instance, from March through April 2020, foreign central-bank swap-line borrowing surged to $450 billion from zero. Indeed, Reuters reported that some European officials were worried about whether the Fed would still provide this liquidity under the new Trump administration. The recent firing of two Democratic officials at the Federal Trade Commission and an executive order creating additional presidential oversight over all “independent regulatory bodies” have increased these concerns.
But the proposed century bonds would rely on these swap lines to ensure the accessibility and liquidity of dollar funding markets. Taking a note from the Fed’s own playbook, Trump 2.0 imagines something similar to the Bank Term Funding Program for the rest of the world, or ROW.
Domestic banks are forced to hold Treasurys by U.S. government regulations. Therefore, they buy a lot of low-yielding debt as the debt stock grows rapidly during financial crises like those in 2008 and 2020, when the Fed had already slashed interest rates and the Treasury had to finance new stimulus programs.
In 2023, the Fed backstopped its duration risk. So why not do the same for ROW countries, which also hold U.S. debt for economically mandatory reasons? The ROW remains the largest sectoral holder of U.S. debt, at about one-third. Notably, that’s down from close to 60% during the financial crisis of 2007-09 – but largely because the Fed has picked up much of the tab via quantitative easing, not because of lack of demand. Foreigners hold most of their debt in longer-duration notes and bonds, as they largely serve the purpose of reserve accumulation and perhaps some liability matching.
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03-25-25 1216ET
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