10 Year, Bessent and DOGE

When Trump and Secretary of The Treasury Scott Bessent talk about reducing rates or rates that need to come down, they are referring to the 10 year Treasury rate more than the short term rate that the Fed sets.

As a quick refresher, the Federal Reserve meets eight times per year to adjust short term interest rates. By comparison, market forces set the 10 year treasury rate through supply, demand and buying dynamics. One notable participant, China, is exiting the US Treasury market. China has been a dominant player in the US Treasury market for decades as they sell their trade surplus Yuan to keep the currency price low so that importers can keep buying cheap Chinese goods. When China sells their Yuan, they typically buy diversified reserve assets, like longer duration US Treasuries. This drives the price up and the yields down. However, China’s economy is struggling and the trend towards re-shoring and friend-shoring is not good for their core “Made In China” business.

Total foreign ownership of US Treasuries is at an all time high, up 22% since the onset of Covid. Unfortunately total US debt increased 40% over the same period. All markets work on supply and demand, and the supply of US debt has increased faster than the demand. Hence, this points to long term rates staying higher for longer, regardless of the Fed cutting short term rates. The world simply can’t absorb the increased supply of US debt.

To bring this to a personal level, the Fed rate is like a money market yield. It’s an overnight rate. For investors in money market funds, you get paid monthly and can withdraw your money at any time. By comparison the 10 year treasury rate is more like your mortgage rate in that it represents 10 years of interest payments.

Falling short term rates can help reduce borrowing costs, but what you really want is falling 10-year rates because that better represents the baseline risk free rate. That foundational risk free rate sets the price of all other streams of cashflow on a comparative credit-worthiness basis. Riskier participants (everyone) pay more than the US government to borrow money over 10 year periods.

Scott Bessent and Trump want the 10 year to fall, but that’s challenging because the free market sets the rate. They can try to nudge it with tactics but they can’t command it to fall just like they can’t command Bitcoin, gold or oil to go to $1m. Bessent can tweak the supply of longer duration debt. He can also telegraph all of his moves and be predictable to help save us all from surprises. Markets don’t like surprises. Surprises increase ‘risk’, which impacts price and is counterproductive to the goal of reducing 10 year rates.

More important than subtle long duration treasury control is reducing our need to continue to grow debt faster than it can be absorbed and faster than GDP can grow. If debt growth exceeds GDP growth for too long it spells guaranteed disaster. “Too long” is an unknowable timeframe, but it would be better to see a change sooner rather than later.

This points to DOGE. If you strip out the brand names involved, DOGE is simply a project to scrutinize government spending to get it back in line so that debt growth does not continue at an unchecked breakneck pace. The success of DOGE is critical to realigning spending, debt, inflation and GDP. It’s impossible to know week by week if DOGE is making progress. I encourage people as a general rule not to consider the media, twitter or late night comedy routines to be a true measure of DOGE progress.

We won’t know if DOGE is successful until much later. Regardless of what you think of the brand names involved, we should absolutely cross our fingers that they are successful in reducing government spending. This is especially true if you want to see the 10 year treasury rate fall so that real estate and other cash flowing assets can realign with more productive and sustainable trajectories.