The Borrowing Crisis Looming Over the Trump Presidency

U.S. Treasury Secretary Scott Bessent said in an interview Thursday that he and President Donald Trump are eyeing 10-year Treasury yields as a way to cut borrowing costs for Americans, which remain high despite last year’s interest-rate cuts.

Newsweek reached out to the U.S. Treasury for comment via email.

Why It Matters

The Federal Reserve initiated a rate-cut cycle last year for the first time since March 2020, but 10-year Treasury yields have been rising since last year, chilling the impact of those cuts on mortgage rates for prospective homebuyers.

The 10-year Treasury yield often moves inversely with stock prices. When Treasury yields rise, borrowing costs typically increase.

If the Trump administration is unable to lower borrowing costs, consumers will continue facing high interest rates that threaten to lock them out of the housing market, which is already facing an affordability crisis in many parts of the country, triggered by a low supply of housing, housing prices that haven’t returned to pre-pandemic levels and stubbornly high mortgage rates.

All of that suggests a looming political crisis for the president, who rode a wave of economic frustration over high prices to the White House for a second time.

What to Know

The 10-year Treasury yields, which impact medium and longterm rates, have risen over the past six months. At the end of August 2024, yields were hovering around 3.9 percent, lower than the 4.49 percent level they were hovering around Friday. Economists say that as long as these rates remain high, the cost of loans for purchases like homes, will also remain high, making it particularly difficult for those seeking to break into the housing market for the first time who do not benefit from the equity built up in a current home.

These yields are influenced by a number of geopolitical and economic factors, with the policy of the Federal Reserve being a main driver. A rising yield indicates confidence in the economy, as well as higher borrowing costs, while a falling yield signals economic uncertainty.

“When investors are optimistic about the economy’s health, they tend to invest in riskier assets, reducing demand for Treasury notes, causing a need to increase their yield. Conversely, in times of economic uncertainty, investors often flock to the safety of Treasury notes, driving up their prices and lowering them,” according to Investopedia.

Back-to-back rate cuts last year sparked hope that mortgage rates would soon decline after shooting up during the Fed’s post-pandemic war on inflation. The inflation rate has dropped significantly from its peak in summer of 2022, and is nearly back to the Fed target of 2 percent. But now, the Trump administration must fend off another economic crunch regarding borrowing costs.

As of Thursday, the average interest rate in the United States was 6.89 percent, slightly up from 6.64 percent one year earlier and nearly double the 3.45 percent in February 2020, according to data from the Federal Reserve Bank of St. Louis.

Bessent said during a Fox Business interview this week the 10-year Treasury yields are Trump’s top priority to lower these borrowing costs.

“The president wants lower interest rates,” Bessent said. “What he sees, in my talks with him, he and I are focused on the 10-year treasury and what is the yield of that? So if the purpose of lowering interest rates is to lower interest rates, the Federal Reserve—I will only talk about what they’ve done, not what I think they should do from now on—they did a jumbo rate cut and the 10-year rate went up.”

Although the 10-year yields still remain relatively high, Bessent noted that they have dropped a bit over the past few weeks. He said he believes this is because the market recognizes that energy prices will be dropping, and the U.S. can have “non-inflationary growth.”

Not all economists agree Trump’s policies will bring borrowing costs down.

Daryl Fairweather, Redfin’s chief economist, wrote in a post to X (formerly Twitter) that Trump’s policies, such as his promise of blanket tariffs on the country’s biggest trading partners, are having the effect of driving up the 10-year yields.

“Trump’s policies are driving 10-year yields—and mortgage rates—higher. While the Fed cut short-term rates by 1 percentage pt, mortgage rates rose 1 percentage pt because markets feared his tariffs & tax cuts would fuel inflation and debt. Easing those worries could bring yields down,” she wrote.

In a follow-up email to Newsweek, Fairweather said the yields remain high because of “economic and political uncertainty.”

“Inflation isn’t coming down fast enough and could remain a thorny problem for the Fed for years to come, especially if the economic policies of the Trump administration cause higher prices or higher deficits,” she said.

Widespread tariffs could cause inflation and stagnation, which would be “difficult” for the Federal Reserve to address, Fairweather said. Cutting taxes, without cutting spending in tandem, could also cause more inflation. The Trump administration must signal to markets they will be “responsible stewards of the economy” to compel a drop in the yields, she said.

Kevin Thompson, a finance expert and the founder and CEO of 9i Capital Group, told Newsweek the the stubbornly high 10-year yields are “largely driven by the bond market’s efforts to pressure the government into reducing spending and shrinking its balance sheet.”

“If the 10-year yield continues to climb, it could slow the economy by making borrowing more expensive, reducing consumption, and exacerbating housing affordability issues,” Thompson said. “This presents a challenge for the Trump administration, as higher yields can lead to slower economic growth and increased financial strain on American consumers.”

Focusing on the 10-year is a “smart policy” because it affects borrowing costs for consumers shopping for mortgages, auto loans and credit cards, Thompson added.

The looming trade war “temporarily lowered rates,” as investors are shifting toward the “safety of government bonds,” he said, noting that investors “flock to safe assets” in times of uncertainty.

What Does This Mean for Borrowers?

Mortgage rates for homebuyers are likely to remain between 7 and 9 percent, Thompson said, adding these higher rates will become the “new normal” due to persistent inflationary pressures.

“Affordability in the housing market will only improve if home prices decline, not because interest rates fall back to the historically low levels seen in the past. The only scenario in which we might see mortgage rates drop to the 3 percent range again would be another economic crisis combined with subdued inflation,” he said.

Fairweather added that potential borrowers should focus on their personal situation, whether they can afford a mortgage on their ideal home and whether they feel secure enough to make a purchase in the current uncertain economic environment.

“Mortgage rates are volatile, they could go up or down, and the political situation is volatile too,” she said.

What People Are Saying

Morningstar analyst Preston Caldwell wrote in a Wednesday note that long-term yields reflect expectations of what the Federal Reserve will do in the future, not necessarily what they’re doing today.

“At the same time that the Fed proceeded with rate cuts in the closing months of 2024, investors were curbing their expectations of future rate cuts in 2025 and beyond. Expectations of the federal-funds rate for the end of 2025 have risen from 2.75%-3.00% as of September 2024 to 3.75%-4.00% currently. That 100-basis-point upward shift in longer-run federal-funds rate expectations is commensurate with the 100-basis-point increase in the 10-year Treasury yield,” he wrote.

Interactive Brokers Economist Jose Torres told CNN on Thursday: “The focus on the 10-year yield re-establishes that monetary policy independence we’ve had for so long, which should exclude any political influence. I think that’s a good precedent to reemphasize.”

JP Morgan Global Investment Strategist Samuel Zief described the phenomenon of the yields rising as “unusual,” pointing to “stronger growth expectations and heightened macroeconomic uncertainty.”

“Economic uncertainty is another major factor contributing to the upward pressure on yields. Questions remain about where Federal Reserve rates will land over the next year or two and what the new administration’s policies might mean for inflation and the Fed’s outlook. There is already approximately 150 basis points of variance among Federal Open Market Committee members regarding where rates should settle,” he wrote.

What Happens Next

The Trump administration is likely to continue implementing his conservative economic agenda over the coming months and years, and the full economic impact of those policies are yet to be seen.