Since US President Trump's announcement of large-scale tariffs on trading partners in early April, which triggered turmoil in the US bond market, the Trump administration has been cautiously adjusting its policies and external communications to prevent further market instability. However, some investors indicate that this "truce" remains highly fragile. This fragility resurfaced on November 5th. On that day, the US Treasury Department hinted it was considering increasing the issuance of long-term bonds. Simultaneously, the US Supreme Court began hearings on the legality of Trump's broad trade tariffs. The benchmark 10-year US Treasury yield—which had declined significantly this year—jumped more than 6 basis points that day, marking one of the largest single-day increases in recent months. Against a backdrop of existing market unease over the scale of the US federal budget deficit, the Treasury's proposal sparked concerns among some investors about upward pressure on long-term bond yields. Meanwhile, the Supreme Court case raised doubts about a critical revenue source—tariffs—used to service the $30 trillion in government debt held by the market.
Citigroup analyst Edward Acton referred to this moment as a "reality check" in a November 6th daily report. A survey of over a dozen senior executives from banks and asset management firms revealed that respondents believe a test of wills is actually playing out beneath the surface calm of the bond market over the past few months, pitting the US government against investors worried about the country's long-term high deficits and debt levels. Reflecting these concerns, the so-called "term premium"—the extra yield investors demand to hold 10-year Treasuries—has begun to rise again in recent weeks.
Daniel McCormack, Head of Research at Macquarie Asset Management, stated, "The bond market's ability to intimidate governments and politicians is unparalleled, and you've seen that this year in the US." He was referring to the bond market plunge in April that forced the government to moderate its tariff escalation plans. He added that, in the long run, if public finance pressures remain unresolved, persistent voter disappointment with government outcomes could trigger political problems. US Treasury Secretary Bassent has repeatedly stated that his focus is on capping yields, particularly the benchmark 10-year yield, as it affects everything from the federal deficit to borrowing costs for households and businesses.
In a speech on November 12th, Bassent said, "As Treasury Secretary, my job is to be the nation's top bond salesman, and Treasury yields are a key metric for that job." He also noted that borrowing costs across the yield curve have declined overall. This public stance, coupled with private interactions with investors, has convinced many in the market that the Trump administration is serious about controlling US Treasury yields. Data shows that after the Treasury proposed expanding an ongoing repurchase program aimed at improving market functioning, some investors closed out previously bearish bets against bonds during the summer. The Treasury has also discreetly solicited investor views on major decisions, with one insider describing the approach as "proactive."
That source said that in recent weeks, the Treasury communicated with bond investors regarding five candidates for Federal Reserve Chair, gauging potential market reactions. Investors were informed that the market reaction might be negative if National Economic Council Director Kevin Hassett were appointed, as he is perceived as too close to Trump. Several investors indicated they view these Trump administration measures as merely buying time. With the US still needing to finance an annual deficit representing about 6% of GDP, the "peace" in the bond market remains risky. These market participants said the government is currently barely containing the "bond vigilantes"—investors who punish fiscal profligacy by pushing yields higher—but only just.
Investors noted that price pressures from tariffs, a bursting market bubble fueled by artificial intelligence (AI), or the prospect of an overly accommodative Fed boosting inflation could all upset the current equilibrium. Sinead Colton Grant, Chief Investment Officer for Wealth Management at BNY Mellon, said, "The bond vigilantes never go away; they're always there. The key is just whether they are active." A White House spokesperson stated the US administration is committed to ensuring the stability and health of financial markets. He said, "Cutting waste, fraud, and abuse from runaway government spending, alongside taming inflation, are among the many actions this administration has taken, boosting market confidence in US government finances and pushing the 10-year yield down nearly 40 basis points over the past year."
Historically, bond markets punish fiscally irresponsible governments, sometimes even costing politicians their jobs. As Trump began his second term, several key indicators watched by bond traders were flashing red—total US government debt had surpassed 120% of annual economic output. On April 2nd, following Trump's imposition of high tariffs on dozens of countries, bond traders' anxiety intensified rapidly. As bond prices move inversely to yields, bond yields recorded their largest weekly surge since 2001, with the US dollar and stocks also falling. Subsequently, Trump chose to retreat, delaying tariff implementation and ultimately enacting rates lower than initially proposed. As yields retreated from what he called a "sickening" moment, he praised the bond market as "beautiful."
Since then, the 10-year Treasury yield has fallen more than 30 basis points, and a measure of bond market volatility recently hit a four-year low. On the surface, the bond vigilantes appear to have retreated. Investors say one reason for this quiet is the resilience of the US economy. Massive AI-driven investment has offset the growth drag from tariffs, while a cooling labor market prompted the Fed to enter rate-cutting mode. Another reason is a series of actions by the Trump administration signaling to the market its desire to prevent US Treasury yields from spiraling out of control.
On July 30th, the US Treasury announced it would expand a repurchase program to reduce the amount of long-dated, less liquid debt in circulation. While intended to improve bond trading efficiency, because the expanded buybacks focused on 10-year, 20-year, and 30-year bonds, some market participants suspected an attempt to cap yields at those maturities. The Treasury Borrowing Advisory Committee—a group of traders advising the Treasury on debt—said there was "some debate" among its members about whether this could be "misinterpreted" as shortening the average maturity of US debt. The aforementioned insider noted that some investors worry the Treasury might resort to unconventional measures, like aggressive buybacks or reducing long-term bond supply, to limit yield increases.
Data shows that bearish bets against long-term Treasuries decreased during the summer when these discussions were ongoing. Short positions in US government bonds with remaining maturities of at least 25 years fell sharply in August but have started increasing again in recent weeks. Jimmy Chang, Chief Investment Officer at Rockefeller Global Family Office, which manages $193 billion under Rockefeller Capital Management, said, "We are in an era of financial repression, where the government uses various tools to artificially suppress bond yields." He described it as an "uncomfortable equilibrium." The US Treasury has taken other market-supportive steps, such as relying more on short-term Treasury bills (T-bills) to finance the deficit rather than increasing long-term bond supply, while also urging bank regulators to ease rules, making it easier for banks to buy US Treasuries.
J.P. Morgan analysts estimate that even with the US fiscal 2026 budget deficit projected to be roughly flat compared to 2025, the supply of US government debt with maturities over one year issued to the private sector will still decline next year. Demand for T-bills is also expected to receive a boost. The Fed has ended balance sheet runoff, meaning it will become an active buyer in the bond market again, particularly for short-term debt. Furthermore, the Trump administration's embrace of cryptocurrency has spawned a new major buyer of government debt—stablecoin issuers. Bassent said in November that the stablecoin market, currently around $300 billion, could grow tenfold by the end of the decade, significantly boosting demand for T-bills.
Ayako Yoshioka, Director of Portfolio Advisory at Wealth Enhancement Group, noted, "I get the sense there's less uncertainty in the bond market; supply and demand are just more in balance. It's a bit strange, but it has worked so far." However, the question many market participants are concerned with is how long this state can last. Meghan Swiber, Senior US Rates Strategist at Bank of America, stated that current bond market stability relies on a "fragile equilibrium"—on one side, benign inflation expectations, and on the other, the Treasury's increased reliance on short-term debt issuance, which alleviates supply-side concerns.
She pointed out that if inflation surges and the Fed turns hawkish, US Treasuries could lose their appeal as a risk diversifier, and demand concerns would resurface. Relying on T-bills to finance the budget deficit also carries risks, and some demand sources, including stablecoins, are inherently volatile. Milan, currently Chairman of the White House Council of Economic Advisers and a Fed Governor, last year criticized the Biden administration for a approach similar to Bassent's current one—relying on T-bills for deficit financing. Milan argued then that this meant the government was accumulating short-term debt, which might need refinancing at higher costs if rates spiked suddenly. However, Milan now declines to comment further on last year's views, only referencing a September speech where he predicted a decline in national borrowing.
Stephen Douglass, Chief Economist at NISA Investment Advisors, said the currency depreciation and yield surge that followed Trump's April tariff announcement—typically seen in emerging markets—unsettled the government. "This has become a significant constraint," he noted.
