After it became clear Donald Trump would be restored to the White House, markets bet interest rates were heading higher. That was a sensible reaction considering Trump had said his top economic priorities were tax cuts, which would mean higher deficits, and tariffs that would raise inflation. Wall Street judged that combination and sold 10-year government bonds, lifting their yield to 4.8%.
It was a bad omen for the administration because the 10-year bond yield sets the rate for all manner of loans, such as commercial and residential mortgages.
But taking Trump at his word is always risky, and there is compelling evidence to show markets believe the administration doesn’t really mean everything it says. That seems sensible, too, considering that as of Monday morning big new tariffs on Mexico and Canada were a sure thing until they weren’t by the afternoon. Anyway, since Trump retook office the yield on the 10-year bond has fallen to 4.4%.
“Surprising fall in bond yields,” commented the strategy team at brokerage firm Evercore ISI in a client report this morning.
The proximate cause of the most recent drop was an interview that Treasury Secretary Scott Bessent gave yesterday on Fox Business.
“He and I are focused on the 10-year Treasury,” Bessent said, with “he” meaning Trump. “He is not calling for the Fed to lower rates.”
It sounds like this means that rather than haranguing Federal Chairman Jerome Powell, the administration will pursue other means to bring down the 10-year bond’s yield. That would be a mighty feat considering the U.S. Treasury market is so huge, but it’s been done before. In an effort to lift the economy after the 2008 crisis, the Fed pursued “quantitative easing” for years, which meant it bought trillions worth of bonds and parked them on its balance sheet to suppress interest rates.
Should you find it difficult to put much stock in what a Trump official says, there are economic factors that explain the decline in interest rates.
For starters, the latest economic data indicate that if inflation isn’t falling much, it doesn’t appear to be rising, either. There are signs that the job market is weakening, which would ease inflationary pressures because higher unemployment means consumers have less money to spend. Job-openings fell in December after climbing to a six-month high in November.
Meanwhile, the fall in the 10-year’s yield has fired up the commercial mortgage market. The MetLife Building is in the market this week refinancing its $1.5 billion mortgage, and 299 Park Ave. is rolling over its $500 million loan. The Spiral, a Hudson Yards tower, last month secured a $2.8 billion mortgage lasting five years at a 5.5% interest rate.
For what it’s worth, the decline in interest rates hasn’t helped consumers much, at least not yet. A 30-year fixed-rate residential mortgage cost 6.95% at the end of January, according to Freddie Mac, down only a little from the recent high of 7.04%.
