Treasury Market Could Be Whipsawed by These 3 Things

Treasury Secretary Scott Bessant says he won’t increase sales of longer-dated debt for at least several quarters. (ALASTAIR PIKE / AFP / Getty Images)

The U.S. Treasury market is off to a rocky start in July with yields rising and prices falling. The path ahead will be determined by three unknowns: Treasury Secretary Scott Bessent’s issuance strategy, the Trump administration’s tariff policy, and the Federal Reserve’s rate-cutting plans.

Investors should brace for continued volatility.

Treasuries marked their best first half of the year since 2020, as the 10-year yield—a key benchmark for rates around the world—declined. A decline in yields was good news for bondholders, who saw their bonds gain in value. [Bond prices move inversely to yields.]

July’s first three trading days reversed some of the first half’s gains, however, as yields rose throughout the period. The 10-year Treasury now yields 4.339%, near the midpoint of its 52-week range, set by a yield of 3.622% on the low end and high yield of 4.802%.

Here are three factors that could change Treasury yields’ trajectory.

Funding the Debt

Bessent has said he won’t increase sales of longer-dated debt “for at least the next several quarters,” in keeping with the strategy established by his predecessor, Janet Yellen. Increased supply of notes and bonds would push prices down and drive up yields as buyers would demand more premium for holding extra debt.

His latest comments, made in an interview with Bloomberg, echo similar remarks made in February.

Yet, the Treasury can’t keep issuance sizes the same for too long. For one thing, the tax and spending bill that Trump signed on Friday widens the gap between revenue and spending. Relying on shorter-dated debt or T-bills with maturities of a few weeks to a year isn’t a long-term option.

“If the Treasury leaned solely on T-bills in the coming years, the T-bill share would rise to almost 28% by year-end 2028,” wrote Jay Barry, head of rates strategy at J.P. Morgan.

The Treasury Borrowing Advisory Committee recommends that the T-bill share to be maintained within the range of 15 to 20% over the longer term. Currently, T-bills make up 21% of the market and have rarely been above 25%. T-bills are a cheap way to borrow, but increased issuance would expose the government increasingly to the whims of the market. If conditions are unfavorable, investors could demand more yield, increasing the government’s borrowing costs.

Investors can expect a deluge of T-bills, at least in the short-term, as the Treasury replenishes its cash buffer. The Treasury General Account had dwindled to $367 billion at the start of the July during the latest debt-ceiling standoff. A year ago, it stood at $802 billion. It is typical for the Treasury to raise money through T-bills after the debt ceiling is lifted.

Tariff Plans

This coming week, investors expect to get the full schedule of tariffs that the government will impose on U.S. imports. Higher tariffs will increase the threat of inflation, which could lead to a rise in bond yields.

Trump told reporters Thursday that the government will start sending about 10 letters a day, beginning Friday, to various countries, setting new tariff rates. He said the rates could range from as little as 10% to 60% or 70%. Trump’s aggressive posture could prompt some countries to offer to reduce trade barriers with the U.S. ahead of a July 9 deadline.

So far, inflation hasn’t shown up in consumer price data, but that doesn’t mean it won’t if higher tariffs are imposed.

What Will the Fed Do?

The Federal Reserve has kept the federal-funds rate steady this year, and hasn’t seen a reason to lower rates yet. Chair Jerome Powell said in congressional testimony last month: “We really don’t know how much of [inflation is] going to be passed through to the consumer. We have to wait and see.”

Rate cuts could push bond yields lower, but that isn’t a guarantee. The Fed’s September rate cut, of half a percentage point, pushed longer yields higher, partly due to the assumption that the Fed’s move was premature. A Fed rate cut often signals that the economy needs a boost, but the economy has remained strong.

A July rate reduction has effectively been taken off the table following another solid payrolls report for June, leaving investors’ attention focused on the Fed’s September meeting. Central-bank policy isn’t likely to have a near-term impact on Treasury yields, but could be an important factor for the Treasury market later this year.

Corrections & Amplifications: The Treasury General Account was at $367 billion at the start of July versus $802 billion a year ago. An earlier version of this article incorrectly said the balance was trillions of dollars.

Write to Karishma Vanjani at karishma.vanjani@dowjones.com