US Treasury crisis tests Washington's tolerance

President Donald Trump's decisions regarding Iran are tested by the bond market, something that is beyond the American president's control. With yields rising rapidly over the past week, a White House official said there is great concern among officials about gasoline prices and the direction of the bond market.

Higher interest rates and high borrowing costs for companies and consumers imply inflation in the items most consumed by Americans, including fuel, the biggest current concern around the White House.

The combination of effects on the economy causes problems for the US Government, as it prepares for the mid-term elections in November. "The markets are causing him pain, and he needs to figure out how to turn it around - and it's not that easy," Greg Faranello, head of U.S. interest rate strategy, said of Donald Trump.

During AmeriVet Securities in New York, Faranello highlighted the long-term impacts of economic pressures. "We are already at levels that will ultimately affect mortgage rates and, consequently, the housing market."

On Saturday, Trump said Washington and Iran have made progress toward a peace deal over the three-month-old war, although on Sunday he stressed there was no rush for a signature.

Markets were attentive and optimistic to Trump's softer comments about Iran over the weekend. Experts say that, more than ever, market prices are reacting to Trump's comments about a resolution to the war.

"I think if the government is concerned about rising yields, trying to defuse the situation with calmer speech is something they can do," said Shawn Snyder, economic strategist at Potomac Fund Management.

In recent weeks, investors in U.S. Treasuries have focused on the difficulty of reaching a deal and the long-term consequences of the war, pushing yields well above 4.5% for the benchmark 10-year bond.

Meanwhile, seeking to contain inflation, Federal Reserve officials are discussing the possibility of raising interest rates instead of reducing them, as Trump has advocated.

On the other hand, some Republicans in Congress are increasingly concerned about the president's calls for pre-election spending. Trump is seeking victory in the midterm elections, which will decide whether Republicans maintain control, albeit limited, of the House and Senate.

Rising Treasury yields directly impact borrowing costs across the economy, including mortgages, credit cards and commercial loans, and can cause financial stability problems.

Bond investors said the government needs to pay attention to this situation as soon as possible. US Treasury Secretary Scott Bessent and the White House have suggested that the high yields would be temporary.

On Wednesday, U.S. Treasury yields pulled back slightly from a sharp rise after Trump said talks with Iran were in their final phase.

Treasury makes historic intervention in interest rates | MORNING CALL

Earlier in the week, the 10-year bond yield reached 4.69%, the highest level since January 2025. The yield has risen more than 50 basis points since the start of the US-Israeli war with Iran, and was at 4.56%. However, the market's reaction to the latest developments in the peace negotiations has yet to be seen.

A sustained increase in borrowing costs could cool demand for housing, affect consumption and even tip the economy into recession. This risk may be relevant in the period leading up to the US midterm elections.

"Affordability is a buzzword in Washington, and for good reason, because it really resonates with a lot of families, and interest rates are a driving factor," said John Kerschner, global head of securitized products at Janus Henderson in Denver.

Still, if a peace agreement is finally reached, the effects could be transitory. This week, Bessent said that high interest rates, especially in the long term, were being driven by the energy shock from the war with Iran, which will prove temporary.

The White House also said any disruption would likely be short-lived. "President Trump has always been clear about the temporary market disruptions as a result of Operation Epic Fury," White House spokesman Kush Desai said in a statement.

Desai said the administration was still focused on Trump's "long-term agenda of accelerating economic growth, reducing bureaucracy and combating public spending fraud to restore America's fiscal health."

Limited options
The bond market has long been a powerful political force capable of shaping policy in Washington, which needs to maintain investor confidence to finance public debt. When investors lose confidence, rising borrowing costs can put pressure on leaders.

James Carville, a former adviser to President Bill Clinton, told the Wall Street Journal in the early 1990s that he would like to be reincarnated as the bond market because "you can intimidate everybody."

Market participants have warned that Washington's ability and willingness to respond may be limited, even if yields soar to a critical level identified as 5%.

Intervening too aggressively in this environment could compromise the credibility of measures against inflation and worsen the pressures that drive up yields.

Sam Lynton-Brown, head of global macro strategy at BNP Paribas in London, said the rally was being driven less by fears about government borrowing and more by persistent inflation, strong economic growth and high energy prices linked to geopolitical tensions.

When yields rise due to economic strength, markets and policymakers tend to view them as less of a problem, Lynton-Brown noted.

The head of strategy highlights that the stock and credit markets have absorbed the higher rates without showing signs of stress. "You have high yields, but so far stocks and credit are doing well on those high yields," he said.

US considers using gravity bombs against Iran; learn about weapons

Source: CNN