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Policies from President Donald Trump's administration are helping keep bond yields higher despite the White House's own attempts to lower them. With the 80-year-old president unlikely to change his spots, Americans may not like what it could take to provide interest-rate relief: a weaker economy that cools borrowing costs but undercuts U.S. growth. The investor base for U.S. debt has become more price-sensitive over the years as central banks and reserve holders have stepped back as buyers relative to parts of the private sector. Some of those global investors are starting to shun U.S. debt because policy changes under Trump have had the effect of worsening the economics for them. That is an uncomfortable turn for markets that are already seeing signs of a competition for capital between the flood of deficit spending and the surge of debt issuance funding the buildout of artificial intelligence. The yield on the 10-year U.S. Treasury note has risen by roughly three-quarters of a percentage point in the past six months. Lately it has hovered near 4.8%, the highest yield of the second Trump administration, despite efforts to bring it down. The Treasury Department will start next week to increase its buybacks of some long-term U.S. debt, an effort designed to improve liquidity in the market. Investors have also raised interest rates as they try to infer how new Federal Reserve Chairman Kevin Warsh will react to inflation that remains above the Fed's 2% target. "Of course, everybody wants to ask for a bit more price to lend money to the U.S.," Ludovic Subran, chief investment officer and chief economist for Allianz, a European insurer and asset manager, said in an interview. That judgment isn't political — it's "pure economics," Subran said. Subran ticked off a set of factors he says have come to add something resembling credit risk to U.S. debt: "soaring [federal budget and trade] deficits, Fed unfazed by inflation, Treasury tampering with markets." He doesn't necessarily believe the U.S. will default on its debts, but he said Allianz — like many other global investors — has had to pay more to hedge its bets in the U.S. The U.S. is projected to hit its $41.1 trillion debt limit between late-winter and mid-summer 2027. This year, "we also have decided not to find duration in the U.S. fixed-income market like before, because it's not interesting," Subran said. After accounting for inflation and hedging, "we were not making money," he said. The rise in yields is a source of aggravation for Americans already frustrated by affordability problems. Mortgage rates have risen to nearly 6.8%. Mortgage rates move with the 10-year Treasury yield. So do auto loans and other forms of consumer debt. Political risks to yields persist There is little sign of easing in the political factors pushing up yields. A fall in oil prices might bring some relief, but an end to the Iran war remains elusive. There is no appetite in Washington to make the political compromises that would ease deficit spending. A meeting of global finance ministers and central bankers in North Carolina this week produced political shots at Canada. Coordinated action to ease borrowing costs wasn't on the agenda. Meanwhile, some large holders are looking to move out of Treasurys into higher-yielding debt. Norway's massive sovereign wealth fund is considering shifting roughly $80 billion of its portfolio now in government debt into other parts of the bond market such as mortgage-backed securities. Meanwhile, U.S. government borrowing continues to rise. The Congressional Budget Office recently had to revise up its expectations for the deficit this fiscal year to $2.1 trillion, a figure that is likely to exceed 6% of gross domestic product. That is an enormous volume of borrowing outside crisis times. AI is driving major new corporate borrowing, too. JP Morgan estimates that five major tech firms and Nvidia, along with special-purposes vehicles those companies use to backstop data-center leases, have issued about $320 billion in debt so far this year. "Hyperscalers are issuing so much debt that they may be causing a supply-demand issue at the long end of the yield curve," Michael Cembalest, chairman of market and investment strategy for J.P. Morgan Asset Management, wrote to clients this week. That isn't necessarily a bad thing. AI is a bright spot in a U.S. economy hurting for sources of growth. GDP grew by 1.5% in the second quarter, a weaker-than-expected figure that is likely being dragged down by the sharp slowdown in immigration into the U.S. after Trump's crackdown. The labor market has also shown unusual moves lately. Friday's report that payrolls grew by 162,000 comes against a longer-term environment where firms are reluctant to hire or fire. Competition in the debt market could drive an innovation boom as firms vie for the market's favor. It's too early to make a definitive judgment, but the possibility of that kind of growth and productivity boom is one explanation for the rise in real yields, which adjust for inflation. The yield on 10-year TIPS — a Treasury instrument that accounts for inflation — has risen by 67 basis points over just the past six months, to 2.43% on Thursday, according to FactSet data. Breakevens, which measure inflation, have been flat over the same period. The rise in real yields is "more of a reflection of the strength of the economy," New York Federal Reserve President John Williams told CNBC Wednesday. Some people want to read the rise in yields as dragging on the economy, but that logic is backward, he said. "It's not really about financial conditions affecting the economy. It's more about the economy affecting financial conditions," Williams said. The flip side of Williams' analysis is that it may take an economic slowdown for borrowing costs to cool. But that isn't a solution anyone would want to root for.
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