Overnight, the US Treasuries curve bull-flattened with yields down by 10bps and larger across all tenor as market participants re-assessed duration risks. Ostensibly, Trump's Treasury Secretary pick, Scott Bessent, may have sparked the rally. Reportedly, Bessent had proposed a "3-3-3" economic plan that seeks to reduce the budget deficit to 3% of GDP, achieve 3% GDP growth through deregulaton and increase oil production by 3mn barrels a day. From a rates perspective, investors may have jumped on the point that Bessent is keen on budget consolidation. There are several points to note.
First, USTs have had an extended sell off over the past few months. Some pullback is needed. Trump's pick of Bessent provided some hope that he may be a moderating voice in Trump’s cabinet and the worst of the tariffs and widening budget fears could be averted. This narrative may extend in the short term, providing a further boost to sentiment.
Second, it is not clear that Bessent's views would be fully aligned with what Trump intends to do. Until Trump gets inaugurated and sets out specific policies, market participants are only able to speculate on the outcomes. Accordingly, USD rates have to embed significant term premium when we extend the timeframe beyond the short term. In short, without a clear path to smaller fiscal deficits, bond vigilantes would likely return, buoying US yields over the medium to long term.
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