On Wednesday, U.STreasury Secretary Scott Basset shared insights during an interview, signaling a shift in the government's focus regarding fiscal policyInstead of pressuring the Federal Reserve directly to reduce interest rates, the administration aims to influence the yield on the 10-year Treasury bondThis strategy seeks to lower borrowing costs more indirectly, allowing for a potential easing of financial strain for consumers and businessesWhile this proclamation offered Federal Reserve Chair Jerome Powell a moment of respite, market experts remain skeptical about how feasible this strategy is in reality.

Basset clarified that his intention is not to directly advocate for a reduction in interest rates by the Fed but instead to promote a natural decrease in the 10-year Treasury yield through government policiesHe argued that a suite of economic policies rolled out by the U.Sgovernment should help drive down long-term interest rates without necessitating active intervention from the Federal Reserve.

This declaration also alleviated some market concerns regarding government interference with the independence of the Federal Reserve

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Just months prior, on January 23, there were public calls for immediate rate cuts from the administration, raising red flags about possible future pressures on the central bankBasset's recent comments suggest a temporary retreat from that approach, indicating a potential shift in strategy regarding monetary policy.

While the administration emphasized that the decline in long-term rates may occur organically as a result of policy changes, many market analysts maintain that the complexities of actual market behaviors are far more nuanced.

Mark Malek, Chief Investment Officer at Siebert Wealth Management in New York, underscored that the real power over the 10-year Treasury yield lies within the market itself“Who genuinely controls the yield on the 10-year Treasury?” asked Malek“The simple answer is: the market.” He elaborated that expectations surrounding inflation are the critical determining factors for long-term Treasury yields

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Risks such as rising tariffs, an expanding federal deficit, and increasing government debt all pose potential inflationary pressures that could ultimately drive yields up rather than down.

The data reflects a notable trend: since September 16, 2023, the yield on the 10-year Treasury has ascended from 3.622% to a peak of 4.802% on January 13, representing an increase of over 1 percentage pointRecent movements in these yields have been influenced by the government's fluctuating decisions concerning tariffs imposed on Mexico and Canada, with the yield momentarily retreating to around 4.44% following announcements about deferred implementation.

Concerns are mounting as the projected budget deficit for the 2024 fiscal year approaches an alarming $2 trillionThere are apprehensions that fiscal shortfalls could continue for several years, intensifying the supply of U.Sdebt and consequently exerting upward pressure on Treasury prices, thereby elevating yields

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This scenario presents a significant hurdle for the administration's goal of lowering long-term rates, given the prevailing market conditions.

Experts in the financial sector assert that while the government may have various tools at its disposal to influence long-term Treasury yields, the effectiveness and viability of these measures are questionable.

One potential method involves the Federal Reserve's direct intervention, termed “yield curve control.” This approach contemplates the central bank engaging in open market purchases of long-term Treasury bonds, which would naturally push prices higher and bring yields downHowever, such maneuvers are historically rare in the U.S., the last instance dating back to World War II in 1942, when the Federal Reserve sought to assist government financing through controlled long-term ratesComparatively, the Bank of Japan has adopted prolonged strategies of similar nature, maintaining short-term rates around -0.1% while keeping the 10-year Treasury yield near zero

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Whether the U.SFederal Reserve is prepared to emulate such strategies remains uncertain.

The actions taken by the Treasury Department in terms of debt adjustment are closely monitored, especially the process known as “operation twist.” This specific maneuver bears unique implications for the economyIt involves the Treasury buying back long-term bonds while issuing shorter-term instruments for refinancingThis strategy parallels the Federal Reserve's own approach in 2012, which aimed to navigate challenging economic conditions by selling short-term securities to buy long-term ones, thereby adjusting the bond market's supply and demand balance and modifying interest rate structuresCurrently, the Treasury's similar efforts focus on altering the maturity structure of U.Sdebt to influence market interest ratesBy repurchasing long-term bonds, the supply of these securities diminishes, potentially driving prices up and yields down; meanwhile, the issuance of short-term bonds increases availability in that sector, putting upward pressure on short-term yields.

While such strategies could yield short-term effects on the 10-year Treasury yield, Gregory Faranello, head of interest rate trading and strategy at AmeriVet Securities, posited that the long-lasting impact may not be substantial

He stated, “The market's primary driving force remains inflationIf inflation stays elevated, any artificial policy intervention will struggle to maintain lower rates.”

The current climate reveals that the U.Seconomy continues to perform robustly, with GDP growth hovering between 2% and 2.5%, while inflation remains at around 2.5% to 3%. Given these circumstances, the likelihood of long-term rates seeing a significant downward shift is limitedFaranello remarked, “If energy prices were to decline, both long and short-term rates might follow suit, but the interplay with trade tariffs complicates market interpretations significantly.”

Add to this the barrage of newly issued U.Sdebt each month intended to facilitate government spending, and sustaining low long-term rates becomes increasingly difficultFaranello concluded, “While the government could explore policies akin to ‘operation twist,’ its capacity for implementation is limited, with only minimal impact on long-term yields.”