Why the Administration Is Targeting 10-Year Yields Instead of the Fed Funds Rate

Forget rate cuts—lowering 10-year Treasury yields is now the administration’s priority. Here’s what that means for markets and the economy.

KEY TAKEAWAYS

• The administration wants to focus on lowering 10-year Treasury yields instead of pushing for Fed rate cuts.
• Mortgage rates are tied to 10-year yields, not the Fed Funds Rate—so this shift matters for homeowners.
• Lower 10-year yields could ease housing inflation, reduce government borrowing costs, and weaken the U.S. dollar.
• The government can’t directly control 10-year yields, but it has tools like debt buybacks and shifting maturity profiles.
• Recent Treasury yield declines are driven by safe-haven demand due to trade tensions—but that brings its own risks.

My Take

• The White House is finally talking about the right thing—but can they actually make it happen?
• If you care about mortgage rates, stop obsessing over the Fed—watch 10-year Treasuries instead.
• Lowering 10-year yields could help the economy, but bond markets—not politicians—ultimately call the shots.
• Trade wars are temporarily pushing yields lower, but that comes at the cost of more inflation risk later.
• Want lower yields? The government could try buybacks, but reducing the deficit would work better (not that they’ll do it).

Over the rainbow. Is it possible? I couldn’t believe my eyes when I read it this morning. The President, as outlined in an interview by his Treasury Secretary Scott Bessent, does not want the Fed to lower the Fed Funds Rate. What? No way. No, the Administration wants to focus on lowering 10-year Treasury Yields! My regular readers should be rejoicing this as well. I have long been trying to shine the spotlight on 10-year Treasury yields as being more critical for average consumers than the Fed Funds Rate. Let’s get into it, shall we.

First things first, have you ever borrowed money at the Fed Funds Rate? Of course, you haven’t, peasant. The Fed Funds Rate is the overnight borrowing rate charged by banks… to other banks. You see, when banks are short on regulatory reserves, they turn to other banks to give them a temporary bump to avoid… well, I am sure you remember It’s A Wonderful Life, but it doesn't usually turn out that way. That’s it. Overnight, and for a very specific reason. Guess what? The Fed kind of controls that rate, and to be clear, it doesn’t simply set the rate. It is a policy target. The Fed uses all kinds of tools to then push the rate into a range; some of those are so obscure that I don’t want to clog your brain with them before you finish your morning cup. But suffice it to say, it is arcane, which is really the best way I could find to describe it. However, to be fair, it works—at least between banks.

Now, to be clear, that target, along with some of the other things that the Fed heavily influences, like open market operations with repos and match sales, the Fed is able to get overnight rates to where it wants them. Those targets make the leap into “our” world through the Secured Overnight Financing Rate, or SOFR, which is the successor to the now-retired LIBOR. Many commercial loans are based on SOFR plus some sort of spread. So, if it goes down, commercial borrowing rates go down, and vice versa when the Fed ups its target. So, have you borrowed any money at the SOFR rate or even based on the SOFR rate? Well, you might have, if you have an adjustable-rate mortgage (ARM), but you probably don’t because of the low-interest rate environment that prevailed prior to 2022.

Recent data suggests that around 15% of residential mortgages are adjustable. The remaining mortgages are typically fixed 15 and 30-year mortgages. And what are those based on? Well, they are closely tied to 10-year Treasury yields. So, if 10-year Treasury yields are high and getting higher, as they have since the Fed began its easing last year, conventional, fixed mortgage rates would behave similarly. Check out this chart that shows how 30-year fixed mortgage rates have followed that path of 10-year Treasury Note yields over the past two years.

It’s pretty clear, isn’t it? Now let’s talk about some benefits of lower mortgage rates. Despite the well-known “low interest rates cause inflation to flare up” axiom, the real estate market has some interesting behaviors. Let me also remind you, if you don’t already know, that home prices are sky-high, and that housing inflation is one of the 2 or 3 last holdouts in this recent inflationary era.

Why is this happening? It has a lot to do with supply and demand. You see, there is a significant lack of supply in housing. Why? Because builders can’t build new homes fast enough AND existing homeowners are not selling, which is partially prompted by… wait for it… high mortgage rates! Now, on the former, builders ramp up their activities when… wait for it… rates are lower, because they are highly reliant on borrowing to do so. In other words, folks, lower interest rates… er, BOND YIELDS, can help ease up housing and rent inflation.

So, yes lower 10-year yields can really have a positive impact on the housing market and ultimately cause inflation to ease. Now there are other reasons why the Administration would want to see lower 10-year yields. An obvious one is to save money! 💰💰 Remember, the Government borrows lots of money, and higher interest rates are costing it—taxpayers—er, US a lot of money to finance that debt. That would be a good thing!

Though it is a far more complicated issue at the moment, at a high level, the President would like the Dollar to be weaker. A strong Dollar is good for purchasing goods abroad but bad for American companies wishing to sell American-made goods to foreign buyers. Higher relative sovereign bond yields causes domestic currencies to rise due to increased demand in currency exchange—necessary to buy Dollar-denominated bonds. Therefore, lower Treasury yields would reduce demand and cause the upward pressure on the Dollar to ease somewhat.

Finally, I want to be clear that indeed, companies, and state and local governments can also save money if 10-year yields go down, because they too, borrow money which is priced, based on Treasury yields. In these cases, lower borrowing costs would be stimulative to the economy, which is aligned with more traditional monetary theory.

So, YES, it is a good idea to try to keep 10-year Treasury Note yields low and perhaps get them lower. But the question is who is in control of 10-year yields? The answer is quite simple: THE MARKET. It is the market that pushed 10-year yields higher recently. Bond vigilantes, if you will. Those yields have risen as a result of expected inflation resulting from trade friction (tariffs and trade wars), and the expected rise in deficit spending and the resulting rise in Government debt.

It would seem that the Administration can have an impact on both of those drivers. It could simply spend less, lower the deficit, and maybe… not levy inflation-causing tariffs. Reducing the deficit is the age-old prescription for lowering borrowing costs. It is accurate, but alas, elusive, and it is not evident that the results would arrive in short order. However, the Government can cause 10-year yields to decline by going into the open market and buying 10-year Notes causing prices to rise and yields to fall. That is referred to as yield curve management and the Fed is responsible for that. Remember Operation Twist? So, the Fed can do it, if the President can get it to act on his behalf. We will call that possible but not likely. So, what can the Treasury do? Well, technically, the Treasury CAN conduct a buyback of outstanding long-maturity treasuries AND finance the buyback by selling short-maturity notes and bills. It has been done before and the Treasury can change its financing profile to weigh more heavily on shorter maturities. Those can have more immediate impacts on 10-year yields.

One last interesting item to note. You may notice in the chart above that yields have declined slightly in the past few weeks. One of the reasons that those yields have come down is the escalation of trade tensions which have caused investors, both domestic and foreign, to buy Treasuries as a safe-haven asset, but those declines come at the cost of inflation. To sum up, the President and Scott Bessent get high marks for focusing on 10-year yields, but the final grade will only be issued if, when, and HOW the administration gets the job done.

YESTERDAY’S MARKETS

Stocks traded higher yesterday as trade war fears were digested and the tape was quiet on the trade front. Bonds logged their own gains yesterday as longer-maturity yields hit fresh ’25 lows. ADP employment numbers painted a picture of a solid labor market at the start of the year—confirmation of that will have to wait until the BLS numbers are released on Friday.

NEXT UP

• Initial Jobless Claims (February 1^st) is expected to come in at 213k, slightly higher than last week’s 207k claims.
• Fed speakers today: Waller and Logan.
• Key earnings today: Tapestry, Warner Music Group, Hershey, AGCO, Blue Owl Capital, ROBLOX, Peloton, Eli Lilly, Bristol-Myers, Air Products, Honeywell, Zimmer Biomet, Under Armour, Yum! Brands, Philip Morris, Ralph Lauren, Onto Innovation, Monolithic Power Systems, Cloudflare, Illumina, Expedia, Pinterest, Skechers, Lumentum, Fortinet, Amazon, elf Beauty, Microchip Technologies, and Cleanspark.

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