The Trump administration is struggling to assuage investors’ concerns over the U.S. economy.
The 10-year U.S. Treasury bond yield hit 4.798% on Tuesday morning, the highest rate for investors’ returns on the government debt in 20 months. The bond market’s new highs cap a summer of volatility for yields that have been climbing since the United States began attacking Iran in February. The stakes are high for the U.S. economy: High bond yields mean higher borrowing costs for mortgages, auto loans and consumer credit.
Yields have worsened as investors brace for potential interest rate hikes this month and face uncertainty around President Donald Trump’s inflation-stoking foreign policy and the country’s ballooning debt, economists say.
“Bond yields will keep rising if our fiscal health and inflation concerns aren’t fixed,” Jai Kedia, a research fellow at the libertarian Cato Institute, wrote in a text to NOTUS. “If the administration is serious about lowering borrowing costs, it should reverse course on its own bad policies like tariffs and conflict in the Middle East, along with getting government spending back on track.”
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Treasury Secretary Scott Bessent downplayed Tuesday’s rising yields in remarks at the Group of 20 summit, a meeting of the world’s top finance ministers taking place in Asheville, North Carolina, this week.
He pointed to the U.S.’s continued economic growth amid the Iran war, including the explosion of the artificial intelligence sector.
“I don’t think that we’re in any kind of a dire situation,” Bessent said during a discussion with Fox Business host Larry Kudlow. “The U.S. bond market has been the best-performing bond market. What happens over a month doesn’t matter.”
The administration has been sensitive to the bond market’s swings, however. Bessent attempted to soothe concerns in August, announcing an initiative to offload at least $4 billion in government debt from the market. Bond yields quickly rebounded, however, and have remained high.
Inflation is currently a primary driver of bond yields, economists told NOTUS. Investors have been in limbo this year as the Federal Reserve has punted on interest rate changes. There are some signs investors anticipate interest rates will go up to tamp down inflation, especially after Fed Chair Kevin Warsh noted the issue in his first major speech at Jackson Hole, Wyoming, last week.
“We must be confident that underlying inflation is moving to our objective, clearly and at sufficient speed,” Warsh said. “Otherwise, we have work to do. That’s our job, that’s our mandate and that’s our charge to keep.”
Economists say the only lasting way out of the bond yield problem is to tackle inflation and the economy’s structural issues. Conservatives have pointed to the federal deficit, calling to reduce government spending — something Bessent also alluded to last month.
“The No. 1 thing the U.S. government can do to reduce those yields is to reduce the deficit,” said Judge Glock, the research director at the conservative Manhattan Institute. “It would also assure bondholders and bond traders that the U.S. could get its debt under control over the long term.”
Ryan Young, a senior economist with the libertarian Competitive Enterprise Institute, noted that Tuesday’s yield highs could also be the result of the news cycle, including Warsh’s Jackson Hole speech, flaring tensions between the U.S. and Canada and resumed fighting in Iran.
“What’s happening today could well get canceled out tomorrow, but in the long-run trajectory until something does get done about the debt situation, I would look for a slow long-term creep-up, along with plenty of day-to-day volatility as stories pop up,” Young said.
Conservative economists are skeptical the Treasury can influence bond yields through its buyback operation. Glock said the Treasury can’t lay down those billions of dollars in funds without eventually recouping them through additional debt.
“There’s fundamentally no way that buyback program can work over the medium or long term,” he said. “It’s effectively trading one form of debt for another.”
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