The "new rule" of U.S. Treasury bonds: Don't go against Bessen

U.S. Treasury Secretary Ben S. Bernanke's "obsession" with lowering U.S. Treasury yields has shifted bond traders' attention from the Federal Reserve to the Treasury Department, creating a "Bernanke put option" effect in the bond market.

Bernanke has repeatedly emphasized his determination to push down and maintain low 10-year Treasury yields in recent speeches and interviews, contrasting with the usual vague statements from government officials. Guneet Dhingra, head of U.S. interest rate strategy at BNP Paribas SA, stated, "The bond market used to say 'don't fight the Fed,' and now that saying is evolving to 'don't fight the Treasury.'

Some institutions on Wall Street have adjusted their forecasts for 2025. According to Bloomberg, in recent weeks, chief interest rate strategists at Barclays, Royal Bank of Canada, and Société Générale have all lowered their year-end forecasts for 10-year Treasury yields, partly due to Bernanke's actions aimed at lowering yields.

These institutions believe that this is not just talk; Bernanke can take concrete actions, such as limiting the auction size of 10-year bonds or advocating for looser bank regulations to boost bond demand, and even supporting Musk's efforts to cut the budget deficit.

In fact, Bernanke has already taken some specific actions. Last month, he announced plans to keep long-term debt sales unchanged over the next few quarters, a decision that surprised Wall Street traders who had predicted an increase in supply.

Additionally, he has supported a review of the Federal Reserve's Supplementary Leverage Ratio (SLR). For years, Wall Street bond traders have complained that the SLR has increased the capital they need to set aside when holding Treasury bonds, thereby affecting market-making activities.

Over the past two months, the yield on 10-year U.S. Treasuries has plummeted by half a percentage point, with similar declines seen in yields on other maturities. While this sharp change is primarily attributed to recession fears triggered by Trump's tariff threats, rather than the bond rally that Bernanke hopes to achieve through fiscal discipline and sustainable economic growth.

The market is gradually forming a consensus: this administration will find a way to lower yields. The concept of the so-called "Bernanke put option" has already emerged in the bond market.

"The government has almost set a cap on the 10-year yield," said Subadra Rajappa, head of U.S. interest rate strategy at Société Générale, who has lowered her year-end forecast for 10-year Treasuries by three-quarters of a percentage point to 3.75%. "If they see yields start to rise above 4.5%, I think they will begin to verbally intervene and ensure they reiterate their focus on debt, deficits, and spending cuts."