President Donald Trump's ability to maneuver on economic policy while managing a war is being tested by a force largely beyond his control: the bond market. Despite Trump's claims of progress toward a peace deal with Iran, Treasury investors have focused on the elusiveness of an agreement and the long-term consequences of the conflict, pushing yields on the benchmark 10-year note well above 4.5%.
Fed and Republican Concerns
Federal Reserve officials, aiming to curb inflation, have discussed the possibility of raising interest rates instead of cutting them as Trump has urged. Meanwhile, some Republicans in Congress are growing concerned about Trump's calls for increased spending ahead of the midterm elections, which will determine whether they maintain their slim majorities in the House and Senate.
Rising Treasury yields directly increase borrowing costs across the economy, affecting mortgages, credit cards, and business loans, and can lead to financial instability. Bond investors have signaled that the administration must pay attention to these market forces.
Market Reactions and Anxiety
“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. “We’re already at levels that ultimately will spill over into mortgage rates and it’s going to spill over into the housing market.”
Treasury Secretary Scott Bessent and the White House have suggested that elevated yields will prove temporary. However, a White House official, speaking on condition of anonymity, noted significant anxiety among staff over gasoline prices and the bond market's direction, with fuel prices causing the most concern.
“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. He added that market prices are responsive to Trump's comments about a resolution to the war.
Recent Yield Movements
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 start of the U.S.-Israeli war with Iran on February 28, and was last at 4.56%. The market has yet to react to the latest progress on peace.
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. This risk is particularly significant heading into the November midterm elections.
“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.
Potential Transient Effects
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 added that 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 famously said in 1993 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 of 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. 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.
