Treasury Secretary Scott Bessent continues to reiterate his intentions to lower 10-year US Treasury yields. But attempts to jawbone Treasury yields lower will only work so far. Contrary to the aims of the administration, the federal budget deficit has continued to widen. DOGE won’t fix the public finances, but has been useful for the administration, in diverting attention away from Congress.
In other important respects, however, DOGE is no gimmick. Sweeping cuts to the IRS and climate & environment protection, are arguably the worst possible cuts, with the worst possible consequences for the deficit. The loss of revenue from cuts to the IRS will far outweigh any savings from the Trump administration’s efficiency drives. The same holds true for the gutting of climate initiatives. Trump’s climate assault comes at an inauspicious moment, as climate change accelerates. The US will be left more vulnerable to extreme weather events, with delayed or less accurate severe weather warnings and weaker disaster response coordination.
The risks of entering a negative feedback loop – whereby faster climate change pushes up temperatures, leading to higher energy usage, which in turn amplifies climate change – are growing. The latest IEA report was illustrative of this vicious cycle.
The US exceptionalism thesis is rightly being challenged, as President Trump seeks to consolidate power, ramps up attacks on the judiciary, escalates his push against legal norms, and seeks to take greater control of independent federal agencies. Combined with policies that are worsening the US fiscal position, the stage seems set for investors to start demanding an even higher risk premium for holding long-duration Treasuries.
