By Gertrude Chavez-Dreyfuss and Nandita Bose
NEW YORK/WASHINGTON, May 24 (Reuters) – President Donald Trump’s room to wage war while maneuvering on economic policy is being tested by a force largely beyond his control: the bond market.
Trump says Washington and Iran have been making progress on a peace deal in the three-month-old war. Still, over recent days and weeks, U.S. Treasury investors have focused on the elusiveness of a deal and long-term consequences of the war, lifting yields well above 4.5% on the benchmark 10-year note.
Meanwhile, Federal Reserve officials looking to squash inflation have been discussing the possibility of raising interest rates instead of cutting them as Trump has urged. And some Republicans in Congress are growing concerned at some of Trump’s calls for spending ahead of the midterm elections which will decide whether they maintain thin control of the House and Senate.
Rising Treasury yields feed directly into borrowing costs across the economy, including mortgages, credit cards and business loans, and can cause financial stability issues. Bond investors said the administration would have to pay attention.
“The markets are showing him pain, and he has to figure out how to unwind that—and it’s not that easy,” said Greg Faranello, head of U.S. rates strategy at AmeriVet Securities in New York, speaking ahead of the latest signs of progress in talks. “We’re already at levels that ultimately will spill over into mortgage rates and it’s going to spill over into the housing market.”
U.S. Treasury Secretary Scott Bessent and the White House both suggested that elevated yields would prove temporary. Still, a White House official who was granted anonymity to speak candidly noted significant anxiety among staff over gasoline prices and where the bond market is headed, adding that nothing was causing more anxiety than fuel prices right now.
“I do think that if the administration is worried about higher yields, then trying to de-escalate the situation with calmer words is something they can do,” said Shawn Snyder, economic strategist at Potomac Fund Management in Bethesda, Maryland. He added that market prices are responsive to comments from Trump about a resolution to the war.
On Wednesday, yields on U.S. Treasuries retraced some of their sharp run-up, after Trump said talks with Iran were in their final stage. Earlier in the week the 10-year yield touched 4.69%, the highest since January 2025. It has surged more than 50 basis points since the February 28 start of the U.S.-Israeli war with Iran, and was last at 4.56%. Reaction to the latest progress on peace is yet to be seen in the market.
A sustained rise in borrowing costs could cool housing demand, weigh on consumer spending and, in a worst-case scenario, tip the economy toward recession. That risk could prove especially significant heading into the U.S. midterm elections in November.
“Affordability is a buzzword in Washington and for good reason because affordability really resonates with a large number of households and interest rates drive a lot of it,” said John Kerschner, global head of securitized products at Janus Henderson in Denver.
Still, if a peace deal is ultimately brokered, the effects could be transient. This week, Bessent said elevated yields, especially at the long end of the curve, were being driven by the Iran war energy shock that will prove temporary.
The White House also said any disruption was likely to be short-lived.
“President Trump has always been clear about temporary market disruptions as a result of Operation Epic Fury,” White House Spokesman Kush Desai said in a statement.
He said the administration was still focused on Trump’s “long-term agenda of accelerating economic growth, cutting red tape, and slashing fraud in government spending to restore America’s fiscal health.”
LIMITED OPTIONS
The bond market has long been a powerful political force that can shape policy in Washington, which must maintain investor confidence to finance government debt. When investors lose faith, rising borrowing costs can pressure leaders.
Former President Bill Clinton’s political strategist James Carville said in 1993 in a well-known phrase that he wanted to come back as the bond market, because “you can intimidate everybody.”
Market participants warned that Washington’s ability and willingness to respond may be limited, even if yields spike to a key pain level they identify as 5%, particularly when rates are driven by strong growth and persistent inflation rather than credit concerns.
Intervening too aggressively in that environment risks undermining credibility on inflation and could exacerbate the pressures pushing yields higher.
Sam Lynton-Brown, head of global macro strategy at BNP Paribas in London, said the rise was being driven less by fears over government borrowing and more by sticky inflation, strong economic growth, and elevated energy prices tied to geopolitical strains.
When yields rise due to economic strength, markets and policymakers are less likely to view them as problematic, he noted. Indeed, equity and credit markets have so far absorbed higher rates without showing signs of stress.
“You’ve got high yields, but so far stocks and credit are fine with those high yields,” Lynton-Brown said.
(Reporting by Gertrude Chavez-Dreyfuss in New York and Nandita Bose in Washington; Additional reporting by Dave Lawder and Matt Tracy in Washington and Laura Matthews in New York; Editing by Megan Davies, Paritosh Bansal and David Gregorio)
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