Questions linger over US Treasuries as government chases economic goals

Since his inauguration on January 20, 2025, US president Donald Trump has been pursuing a relentless economic agenda aimed at eliminating the impact of what he and his administration see as the anti-American policies of foreign nations.

Import tariffs, with the ostensible aim of rebalancing global trade, reviving the US manufacturing sector and raising capital to reduce the nation’s debt pile, have raised fundamental questions about the international financial order.

“Tariff is the most beautiful word in the dictionary,” Trump said in the run-up to the US election in 2024, a year in which the country’s goods and services deficit was $918.4bn, according to the US Bureau of Economic Analysis.

Trump’s wide-reaching trade levies, which have changed continuously since he first announced them on April 2 — which he termed as ‘liberation day’ — hit prices and caused a sell-off in US Treasuries, equities and the dollar.

These movements have since prompted speculation around the characteristics of US government bonds and their previously unquestioned status as safe haven assets. Unofficial policy proposals from Stephen Miran, who chairs the president’s Council of Economic Advisers, have only fuelled speculation that holders of US Treasuries may have to get used to foundational changes.

Before taking up his position after Trump’s victory in November, Miran published his now seminal paper: A User’s Guide to Restructuring the Global Trading System, in which he discussed how the US could use the threat of tariffs to bring about a multilateral agreement to devalue the dollar and ease its trade deficit while maintaining favourable borrowing costs for the Treasury.

According to Miran, the rest of the world should pay the US for supplying the world with public goods in the form of reserve assets, as this artificially inflates the value of the dollar and diminishes the competitiveness of US exports.

Miran wrote that the tools at the government’s disposal to meet this objective, include charging a “user fee” on reserve assets held by foreign countries and swapping existing US Treasuries into century bonds. Many could perceive these actions as an effective US default.

“In one sense the US Treasury as a product hasn’t changed, but the government’s commitment to it, especially if you are a foreigner, is suddenly being called into question,” says Matt King, macro and credit strategist and founder of the financial market research firm Satori Insights.

“Also, the suggestions in the Miran paper would have been unprecedented previously, but, as the tariffs have shown us, nothing is out of the question at this point,” he adds.

The White House has not included these policies in its official approach to the economy and even Miran has distanced himself from them. However, they have clearly changed how market participants perceive the US Treasury product and the implications for other borrowers in the capital markets are still unclear.

While unofficial proposals or personal writings about policy leave bond investors hanging, official government policies are also driving a change in the perceived risk profile of Treasuries.

On May 22, the US House of Representatives passed a budget reconciliation bill that mirrors much of what President Trump wants to implement on tax and the economy. According to an independent committee, it will add $3tr to the US debt over the next decade if it makes it through the Senate in its current form. Just six days earlier Moody’s Ratings stripped the US of its final triple-A rating, citing concerns over the country’s rising debt burden.

The US had a debt-to-GDP ratio of 98% in 2024, according to Moody’s. The credit rating agency forecasts that the federal debt burden will rise to about 134% of GDP by 2035.

Marcello Estevão, chief economist at the Institute of International Finance and adjunct professor at Georgetown University, thinks that the suggestions in Miran’s paper try to avoid what the US really needs and what is contrary to the Congressional bill: a “traditional, old fashioned fiscal adjustment”.

Part of the bill, which the president delights in referring to as “big and beautiful”, are sure to pique the interest of readers of Miran. Section 899 permits the government to impose explicit and automatic taxes on foreign investors in the US if the administration deems the tax regime of their jurisdiction to be unfair. This seemingly opens the door to taxing US Treasury returns along the lines of the ‘user fee’ that Miran suggests.

Estevão points out that a policy which threatens to arbitrarily tax foreign capital is a direct attack on Trump’s goal of incentivising firms to produce in the US.

“One thing that you can see from the proposed budget is a certain recklessness with respect to reducing taxes and running deficits over a very long period,” says King, who thinks that Section 899 of the bill is an example of the behaviour that is causing a widespread market re-evaluation as to whether US assets still constitute a safe haven.

“When creditors perceive the US as acting in an irresponsible fashion, there is scope for this snowball dynamic in which debt will get refinanced at higher levels and things get gradually worse,” he says. “And recent long bond auctions in the US and elsewhere show there is always the potential for creditors to think twice.”

In the immediate run-up to the House passing Trump’s budget bill, both the 30 year and 20 year Treasury sold off past the 5% yield level. Though not historically high, elevated borrowing costs could weaken US credit fundamentals further and accelerate the snowball dynamic that King refers to.

Ed Yardeni, president of the investment strategy firm Yardeni Research, coined the term ‘bond vigilantes’ in the 1980s to describe investors who sell government bonds in protest at economic policies. But now Yardeni stresses that, although investors can put pressure on the US government by inflating yields, they are not the only force in the market.

“If bond vigilantes act up and push yields, then Scott Bessent can do what [former Treasury Secretary] Janet Yellen did and finance with T-bills instead,” he says. “We are seeing similar things starting to happen in Japan. Ministries of finance can also influence the curve.”

Curve steepening is not a phenomenon confined to the US, though. In recent weeks, as Yardeni points out, the Japanese Treasury has indicated that it could shorten the duration of its balance sheet, and the UK Debt Management Office has already looked at this. Some analysts point to regulatory changes for pension and life insurance funds as significant causes of lower structural demand.

“Stephen Miran previously criticised Janet Yellen for relying on short term debt, accusing the Treasury of stepping on the Fed’s toes and politicising debt management to get Biden re-elected,” said Bob McCauley, an economist who has spent most of his career working at the Bank for International Settlements, and before that at the Federal Reserve.

“People on Wall Street have been watching Secretary Bessent, who endorsed this criticism, very carefully with regards to the Treasury’s funding plans,” he adds. “Let’s see if he ends up eating his words and joining other major debt managers in cutting the Treasury’s long bond auctions.”

Despite the disruptions in economic policy and the perceived fears on Wall Street, the US curve steepening has not come alongside long end US Treasuries underperforming against swaps, as one may have expected to see as risk increases. The yield on the 30 year is trading only 4bp higher over swaps than it was at the start of the year.

Both King and Yardeni say that it seems plausible that talk around easing the supplementary leverage ratio (SLR), a capital requirement placed on banks, could be responsible for the relative stability in swap spreads.

The SLR requires the largest banks to maintain a 5% ratio of its tier one capital against its total assets, including US Treasuries. It was established in 2014 as part of the Basel III reforms. Exempting US government debt from the requirement would potentially increase liquidity in long end bonds by reducing market making constraints.

Scott Bessent, the US Treasury Secretary, who has previously suggested that an SLR amendment could lower US Treasury yields by 30bp-70bp, has indicated that regulators are close to easing the constraint and that reform could come as soon as the summer of 2025.

Adding credibility to this line of thinking is Federal Reserve chair Jerome Powell, who said in February that he has “for a long time like others been somewhat concerned about the levels of liquidity in the US Treasury market”. “The amount of US Treasuries has grown much faster than the intermediation capacity has grown,” Powell added.

For Bessent, the reward of easing the policy would be to relieve some pressure on US Treasury yields and swap spreads through increasing the product’s liquidity. However, not everyone is convinced that this would be the result of SLR reform.

“I am relaxed about SLR reform, and almost in favour of it in terms of what it will do to market makers’ ability to make markets,” says King. “But I do not think that a persuasive reason for Bessent to go through with the reforms is because it would relieve pressure on US Treasury yields.

“One reason for this is because banks really do have quite elevated holdings of US Treasuries and securities that they have been running with large losses on. A simple relaxation of the SLR is not going to make them load up on more.”

McCauley agrees: “Who knows how large the banks’ unrealised losses on their government bond holdings are right now? In any case, I can’t imagine that they would be anxious to help the Treasury out by buying long-term bonds if the SLR were eased.”

However, McCauley adds that it could aid banks in putting in arbitrage positions, betting on spreads and such, which could help absorb some of the Treasury’s paper. Estevão didn’t think that reform would be a silver bullet, but he notes that it couldn’t hurt.

Whether SLR reform has any impact on swap spreads will be crucial for supranational, sub-sovereign and agency issuers, which tend to price their bonds over swap rates. The highest rated and most liquid SSAs have been pricing tighter and tighter against US Treasuries in recent weeks, and public sector debt bankers have even been discussing the possibility of these names sustainably trading through US Treasuries in the secondary market.

McCauley thinks that it could start to make sense for the top rated SSAs to consider ramping up dollar issuance if reserve managers start to search for non-US Treasury dollar safe havens.

“If the search for alternative havens creates incentives for well-rated borrowers outside of the US to supply dollar-denominated bonds, then we could see a big boom in issuance by SSAs,” he says.

“There is an underlying rebalancing in which portfolios are moving away from US Treasuries and into European assets,” says Estevão. “I am not sure how sustainable this damage is for the US. If anything, I think that these kinds of suggestions [such as the budget] show where the Trump administration’s priorities lie and, in some sense, this has caused the government to lose credibility.

“People continue and will continue to demand US Treasuries. As a liquidity instrument they are very strong. The market is still functioning how it should but with higher uncertainty, which has resulted in a curve steepening. This result can be seen through a relative stability in the spread between swaps and US Treasuries.”

Others like Yardeni are optimistic the threat that tariff and macroeconomic uncertainty poses to the Republican majority in the House in mid-term elections in 2026 will put pressure on the president to resolve the issue of tariffs sooner rather than later.

Wall Street also seems to be warming to the view that Trump’s policy proposals contain more bark than bite, with the acronym ‘Taco’ – ‘Trump Always Chickens Out’ – gaining in popularity among traders in recent weeks.

“The President’s policy is becoming more predictable,” says Yardeni. “It is now increasingly clear that he huffs and puffs but won’t blow the house down.”