The final pillar in helping long term bond yields lower is DOGE

Markets

US Treasury Secretary Bessent seems to manifest himself as the voice of reason for US President Trump’s chaotic, sometimes illogic, burst of thoughts. In an interview with Fox Business he elaborated on/clarified themes like the ones spelled out by Trump in his WEF-address when he urged OPEC+ to lower oil prices and suggested to be doing a better job than Fed Chair Powell at the helm of the Fed. Centre piece in Bessent’s reasoning remains the 3-3-3 programme which he put forward in the run-up to last year’s elections: getting the fiscal deficit down to 3% of GDP from above 6% in recent year, lifting oil production by 3mn b/d and achieving economic growth of 3%. Getting gasoline and heating oil prices down is key as the energy component is one of the surest indicators for long-term inflation expectations. Consumers will not only be saving money, but their optimism for the future will help them rebuild from the years of high inflation, he argues. Bessent and Trump’s focus is on the 10-year Treasury (yield) according to the Treasury Secretary, rather than the Fed’s benchmark rate. “He (Trump) is not calling for the Fed to lower rates”. Bessent doesn’t say it out loud, but that’s what eventually will happen if they manage such growth rates in a non-inflationary environment resulting in a “good interest-rate cycle”. The final pillar in helping long term bond yields lower is DOGE. “We cut the spending, we cut the size of the government and we get more efficiency in government.” Bessent even takes it one step further by suggesting that the bond market is already recognizing the above-mentioned ploy. While long term US Treasuries effectively outperformed since Trump’s inauguration (bull flattening with front end losing around 15 bps and very long end up to 25 bps), we must add that this is solely due to a drop in real rates while inflation expectations remained sticky just below 2.5%. Our reading (from the bond market) at the moment is one where investors start contemplating a scenario in which Trump’s explosive policy mix risks backfiring to the US economy at a moment when the Fed committed itself to a more/too hawkish monetary policy to fend off inflationary threats (which might end up hurting the economy even more). Some early growth worries are causing the correction in LT bond yields rather than anticipation on a less restrictive monetary policy or a shift lower in inflation expectations. It’s still too early days to draw any firms conclusions with Trump known to be very sensitive to economic growth/the stock market and the administration still having some aces up their sleeves like making 2017 tax cuts permanent.

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US Treasury kept the current auction sizes at unchanged levels for the February to April quarter in the updated quarterly refunding statement released yesterday. It believes they “leave it [the US Treasury] well positioned to address potential changes to the fiscal outlook and to the pace and duration of future SOMA redemptions” adding that based on the current projected borrowing needs it anticipates maintaining these auction sizes for at least the next several quarters as well. Treasury will kick off the funding quarter with a combined $125bn sale next week, consisting of a $58bn 3-yr, $42bn 10-yr and a $25bn 30-yr Note sale. It plans to maintain the February 30-yr TIPS new issue auction size ($9bn) but increase the 10-yr auction size in March as well as the 5-yr one in April to $18bn and $25bn respectively. In terms of buybacks, Treasury anticipates that over the course of the upcoming quarter it will purchase up to $30bn securities across buckets for liquidity support and up to $59.5bn in the 1-month to 2-year bucket for cash management purposes.

Italy’s budget watchdog UPB lowered growth estimates for the country from 1% to 0.8% this year. It also marginally clipped the 2024 estimate from 0.8% to 0.7%. This compares to the 1% for 2024 and 1.2% in 2025 that the Italian Treasury had penciled in. UPB said the downward revision mainly followed on higher gas prices and trade tensions with the risk of US tariffs for Europe looming. Italy is also particularly vulnerable to energy shocks since it imports around 95% of annual gas consumption. Treasury will be reviewing its growth estimates in April. Preliminary growth figures released end-January showed the Italian economy stagnating in Q4 for the second quarter straight.