What will it take?

The 10-year US Treasury note has been a bewildering benchmark since the Federal Reserve first cut rates in September. Convention says its yield should decline when policymakers pivot to easing, because that usually signals the Fed believes rates have become too restrictive and threaten a recession. Instead, the 10-year yield climbed, as if investors believe Fed Chair Powell might yet stick a soft landing. Over the last month, however, it has fluctuated in a narrow range overall. This could indicate investors are now less sure about the economy's future, or simply a period of consolidation before yields move significantly in either direction.

Regardless, a decline in the 10-year yield would be welcome for many reasons, not the least of which is that it sets rates on 30-year mortgages and other important borrowing costs. It’s one of the few goals shared across party lines and economic ideologies, though opinions on how to accomplish that differ. 

The Trump administration and newly minted Treasury Secretary Scott Bessent have advanced a three-part policy framework: reduce the ratio of deficit-to-GDP from the current 6 handle to around 3%, tame inflation by boosting domestic energy production by 3 million barrels of oil per day and achieve 3% GDP growth through deregulation and other pro-growth policies. No one would mistake these for precise goals, but politicians love soundbites and the “3-3-3” plan is just that.

But three can be a crowd. Each of the aspirations could negatively impact the others or be knocked off course by other administration plans: Extending and increasing tax cuts without substantially curbing spending would only increase the deficit, no matter the trimming of costs. The impact of “Drill, baby drill” is overestimated, as inflation is influenced by more than just oil prices. And the extent to which the aggressive deportation leads to tighter labor market could reignite wage inflation.

The US government can also influence yields by selecting which debt maturities to issue. As deficits are expected to grow, increased sales of longer maturity debt may become inevitable, potentially pushing yields higher if not managed carefully.

Then there's tariffs, which could hinder economic growth and boost inflation no matter how "temporary" they are. A trade war that weighs on the US economy is hardly the preferred way to lower Treasury yields. Nor are geopolitical conflicts prompting a flight to safety.

So, what could do the trick? Advances in productivity have often reduced inflation, and AI and other technology promise to increase efficiency as not seen before. So could deregulation, especially in the housing market, which has been the stickiest of all inflation components. Lost in the flurry of executive orders Trump has signed is one establishing a White House Council to remove obstacles impeding new affordable housing, streamline the permitting process and reduce regulatory burdens on homebuilders.

Less chaos in Washington would instill global investor confidence—and it’s not just the White House, as Congress has yet to truly address the debt limit.  

The right mix of regulations is anything but easy to achieve, and unintended consequences abound. For us, the broad uncertainty demands a neutral duration. Until the roller coaster that is the 10-year yield seems near its end, it might be best to minimize interest-rate risk.