A little respite for Jerome Powell. After letting the threat linger for months, the Trump administration has finally resolved not to interfere (for now) in the Fed's decisions. At least, that's what Treasury Secretary Scott Bessent said earlier this month: "He and I are focused on the 10-year Treasury". Translation: the Fed is concerned with short rates, while he and the President are focused on long rates, with the 10-year Treasury as the benchmark.

Scott Bessent's stated aim is to bring down 10-year yields, which have been in a fairly narrow range since Donald Trump's inauguration. To achieve this, he intends to use two levers. Firstly, to rebalance public finances to reduce debt issuance. And secondly, to bring inflation down; inflation expectations being a component of long rates. Once this is established, how can this be achieved in concrete terms?

An impossible equation?

The first tool is Elon Musk's DOGE (Department of Government Efficiency), tasked with cutting public spending. What brings Elon Musk closer to Donald Trump is his appetite for splashy announcements. DOGE is already claiming $55 billion in savings, but it's actually $8.6 billion, at this stage, when you examine the data on its own site. Not enough, for the moment, to alter the trajectory of the deficit. All the more so since the idea of a "DOGE dividend" has been mooted, i.e. paying back part of the savings directly to the Americans.

Then there's the objective of lowering energy prices through increased production. Lower prices should help bring down inflation. But as we have regularly pointed out in these columns, the decision to produce more is a matter for private companies, who have no interest in seeing prices fall.

Finally, there's the regulatory weapon, or more precisely, deregulation. The reasoning is as follows: less regulation means fewer constraints on supply, which reduces inflationary pressures. Bessent presents deregulation as a means of achieving non-inflationary growth. But having more growth (Bessent's target is 3%) and at the same time less inflation is a bit of wishful thinking, to use an expression often used across the Atlantic. Indeed, the inflationary episode of recent years has been, in the American case, the consequence of a demand shock rather than a supply shock. Personal consumption expenditure in the US is well above its pre-covid trajectory. This can be explained by massive fiscal stimulus packages, the wealth effect with rising asset prices and a falling savings rate.

A 180-degree turn

Alongside the fundamental part we have just analyzed, and on which we therefore have some reservations, there is the technical part, i.e. the Treasury's management of debt issues. In 2023, to reduce the pressure on long rates, which had risen sharply, Janet Yellen, Treasury Secretary in the Biden administration, chose to issue more short maturities and therefore fewer long maturities.

The idea was to avoid locking in high yields over the long term. At the time, most forecasts predicted that inflation would return to 2% by the end of 2025. It therefore seemed logical to load up on 2-year bonds while waiting for inflation to come down, and therefore for long-term rates to fall, so as to be able to borrow more over the long term, but on better terms. This strategy has resulted in a decline in the average maturity of our debt. This means that more debt is maturing each year, and therefore more debt needs to be refinanced.

Source: US Treasury, Bloomberg

A point on which Scott Bessent and the Republicans as a whole were quick to criticize the previous administration. Indeed, long rates serve as a benchmark for borrowing rates on consumer loans and real estate. Republicans accused the Democrats of artificially lowering long rates for electoral purposes, thereby stimulating consumption and undermining the fight against inflation.

But, as is often the case in politics, taking up a new post brings a different perspective. From now on, Scott Bessent will be following in Janet Yellen's footsteps, and has no plans at this stage to modify the structure of issuance. Not to be outdone, he has promised that extending debt maturity will remain the medium-term objective.

An undervalued gold stock

Finally, I can't resist mentioning an idea that has been exciting strategists on Wall Street in recent days: the revaluation of the US gold stock. The United States holds the world's largest gold reserves, with over 8,000 tonnes. Since 1973, this stock has always been valued on the basis of $42 per ounce, compared with a spot price of over $2,900.

Thus, a mark-to-market valuation of the gold stock would represent a major boost to the Treasury's balance sheet assets, amounting to some 750 billion dollars. A windfall that could, in the short term, reduce issuance needs (by selling part of the stock) and thus help to lower long-term rates. The limitation of this idea is that it's a one-shot deal. The real problem in the United States is the deficit, i.e. the structural imbalance between federal government revenues and spending.

This is just speculation, based on Scott Bessent's comments earlier this month that the government could "monetize the assets of the U.S. balance sheet" and create a sovereign wealth fund. And for the moment, this idea doesn't really seem to be in the Trump administration's plans (even if things are changing very fast). However, if this kind of idea is mooted, it's proof that everyone sees the debt wall approaching without really knowing how to avoid it. Scott Bessent will have his work cut out for him. What he does have going for him is his experience as a hedge fund manager. So he knows how to get messages across to the market. An essential skill for guiding market expectations and thus influencing long rates.

https://www.marketscreener.com/news/latest/How-Trump-and-Bessent-want-to-bring-down-the-US-10-year-49155255/