Can Trump drive down bond yields?
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Pushkin. If you want to sound clever at cocktail parties right now, there's only one thing for it. You're going to have to talk about, drumroll, the Mar-a-Lago Accord, a master plan sketched out by economist close to very stable genius Donald Trump to weaken the dollar and reorder the global financial system. If that sounds terrifying, it is. And this week, even the guy who came up with the idea suggested it's probably not going to happen.

Dear listeners, you need to know the score and we've got you covered. So today on the show, we're asking Mar-a-Lago or Mar-a-No-Go? See what I did there? This is Unhedged, the markets and finance podcast from the Financial Times and Pushkin. I'm Katie Martin, a markets columnist here at FT Towers in London. Was that whole intro just...

A setup so you could say Mara no go? Pretty much. And I stole that joke also from Deutsche Bank. Katie, you're lucky that cancel culture is dead in the Trump administration because that would be the start of hashtag cancel Katie. Yes. Let me finish my intro. Okay, fine.

I am joined down the line by Rob Armstrong, but also by his underling, the man who makes him look clever, Aidan Ryder. Guys, tell me, have you inadvertently been added to any WhatsApp groups with, for example, the US Treasury Secretary discussing plans to revalue the dollar? Nobody leaks anything to me.

It is so embarrassing. Unhedged needs to be mistakenly added to the chats of the chairman of the Fed, Scott Besant, the treasury secretary who will be discussing today. We are very happy to serve our country by being inadvertently included in high-level discussions. We're not actually on...

signal and we don't have a proper whatsapp group so what you can do is just email us your plans to revalue the dollar at unhedged at ft.com unhedged at ft.com so wall street wonks tedious people like you and me we've all been banging on about the mar-a-lago accord for weeks should we have been that is a reasonable question but guys give me the basics here

Okay, Stephen Moran is a Wall Street guy and he wrote a paper called something like A User's Guide to Restructuring the World Economy that described different ways a Trump administration might be able to eliminate the United States' very large current account deficits with some of its trading partners.

It went on about tariffs and various other things. But the very relevant bit here is it suggested that at some point after tariffs had applied pressure to the rest of the world, the United States could call its major trading partners to the table and insist that they take action to rebalance global trade and economics, something on the model of

of the Plaza Accords of the 1980s. Yes. Perhaps ironically, Donald Trump once owned the Plaza Hotel. Yes. So this is all a real estate play too. Yeah. And the idea, I think, was something like this. You say to them, we need you to systematically strengthen your currencies.

Yes. Much as the Japanese were convinced to allow their currency to strengthen in the 1980s, which makes dollar exports more competitive. Yes. So release your reserves of dollars onto the market. That makes the dollar worth less comparatively because there's a larger supply on the market, which inherently weakens the dollar, and by doing so, strengthens other people's currencies. There were other bits and pieces, but this was the main argument.

And it happened. The central thing here is that the central premise is that a strong dollar is a problem. Yes. And being the world's reserve currency is, as he describes it, a burden. Communities...

quote unquote, have been blighted by the fact in their minds that the dollar is too strong and therefore manufacturing has withered away in the US. So they, and again, they draw a pretty direct line between that and the US opioid crisis. So everything is related. So this miseration of the population in parts of the US is in their minds, at least in large part, down to the fact that they think the dollar is too strong.

So what they say is we need to weaken the dollar...

But also there's a kind of side hustle here whereby they want to apply a kind of pay for play model to US government bonds. So this paper from Moran, who's now, I believe, chair of the Council of Economic Advisers to the president, he talks about, okay, say there were lots of investors out there, sort of semi-government investors out there in the world that own treasuries, they own US government bonds.

What if we flipped some of these 10, 20, 30 year government bonds into 100 year bonds or perpetual bonds and said, if you buy them, then we will be nice to you with tariffs. And also we will provide you with military backup in the event that something were to go wrong. So you'd be underneath the U.S. security umbrella. And by the way, these perpetual 100 year bonds don't pay any interest.

They don't pay any interest and they're not tradable. Yeah. It's essentially a direct cash infusion because you can't trade that, right? The US just gets to have your money for 100 years. And in return, you get an amount of security...

from the United States to be determined later and maybe some favors about tariffs. So if all of this sounds pretty bananas to you, then yes, you have understood it perfectly. It is pretty bananas. And the FT's very own Martin Wolf described it as being akin to a protection racket in relation to this idea of the U.S. security umbrella.

It's really tricky, right? So this has been like kicking around in kind of Wall Street hedge fund circles for quite a long time. Quite recently, it got onto the radar of, you know, tedious columnists like me, but also of analysts, investment banks who've been sending out notes saying this is so out there that

that it's just not going to happen. So try not to worry about it. But just planting the idea, you know, it's a big deal in and of itself, right? Yes. But then yesterday, this guy Moran goes on TV and the Bloomberg reporter who's interviewing him asks, so what about the Mar-a-Lago Accord? And he says, the president

has been very clear that his priority is tariffs. Yeah, i.e., not this. And the reporter really pushed. What about next year? Don't you think this could be a long-term plan? And...

Moran did not give an inch. Yeah. So this paper of Moran's, right, came out in November last year. You can find it on the Internet. And it's like 40 something pages long. And it's, you know, he's saying that this is not policy. This is a series of ideas. And how he described it in the interview with Bloomberg this week was these are all recipes that are out there that we could try. But Donald Trump is the chef. What the chef has chosen is tariffs. And you're watching it and you're like, wow.

No, still confused. It's a weird meal he's making. Yeah, it is a weird meal. But there is a sense, I will say, that there is a sense that the Mar-a-Lago Accord is dead.

But the goals, the dream of the Mar-a-Lago Accord lives on, which means we have every kind of idea. We have every indication that this administration in general and the Treasury Secretary Scott Besant specifically is very keen on.

to make sure the 10-year yield especially stays low and a weak dollar goes hand in hand with that. Every treasury secretary worries about treasury yields because the 10-year treasury yield, let's say, is the price that tells the administration whether they are allowed to spend money or not.

or not. Yes, and we should note that this administration really, really wants to spend money specifically on a massive tax cut. Yeah. So they need permission from the 10-year yield to meet their policy priorities. Yes. They've said something like Doge could create that fiscal space, but looking at their track record so far, it's nowhere near the trillions of dollars they need. No, the Doge doesn't seem to be creating the fiscal space.

that they need, right? The numbers aren't coming through from cost cutting. So they have to think very seriously

I mean, they may yet. It's early innings. Just to break it down a tiny bit more, what they want is low bond yields, which means high bond prices. Yes. So that's where a lot of this Mar-a-Lago Accords stuff falls apart. So it's like, you know, you want to shift the foundations of the whole reason why people buy treasuries is because they're risk-free assets. They're absolutely nailed down. You're always going to get your money back. They want to attach all sorts of terms and conditions to that.

But they also assume that the demand for the treasuries will be there no matter what and that that will keep yields low. There's a lot of kind of conflicting stuff going on in this plan as sketched out. And so it was quite an interesting piece on Substack the other day from Adam Tooze, kind of financial historian. Friend of the Unhedged newsletter. Friend of Unhedged. And he describes this whole issue.

like barrage of analysis of this potential accord as just basically a total waste of time. Like we are just sane washing in his words, this idea that something must be done without a really clear sense of what that thing is and without making sure that all the bits of things that need to be done match up with the

each other. And it's the trouble of trying to enact some logic to what is happening in the Trump White House. We know there's a ton, as you said, there's all these inherent contradictions between their desires for treasuries. There's also inherent contradictions in their desires for the dollar. They want a weak dollar, but they also want to make sure that no central bank is giving up their share of the dollar as central bank reserves. And inherently, to weaken the dollar, that is one route to do it.

It's inherently contradictory. I don't know. I don't see these contradictions that strong. They want a weak dollar.

And they want low cost of capital for the United States in the form of low bond yields. But they also want the dollar to remain the reserve currency of the world. But you can have a weaker dollar that's the reserve currency. Yes, but it only happens in the way that they are trying to do it by lowering bond yields as opposed to rushing supply onto the market to weaken the dollar. The other way they could weaken the dollar, of course, is to tank the US economy while the rest of the world remains fine. No, I hate to tell you, that would not work.

There is no such thing as the United States economy tanking and the rest of the world being fine. If the United States economy tanks, the rest of the world tanks worse and the dollar gets stronger. So the tank the US economy option is actually not on the table. Well, it's on the table in that it could happen. It could happen, but it won't weaken the dollar.

So there's a real possibility here that while we're all picking through this idea for a Mar-a-Lago Accord, that we're all looking the wrong way and concentrating on the wrong thing. Maybe there's already something underway to try and get greater control over the bond market. And what we should be doing is focusing on Scott Besant, the Treasury Secretary. Aidan, you've been writing about this recently, right?

Yes. There's a bunch of theories about what's going on. But essentially, before this administration kicked off, a couple of economic advisors who are now in the administration attacked or criticized Janet Yellen, who was the Treasury Secretary under Joe Biden.

And specifically, Scott Besant and Stephen Moran. And what they said was Yellen was engaging in quantitative easing or providing liquidity to the market by other means. And doing so by increasing the issuance of short-dated treasuries, so T-bills, over the issuance of long-dated treasuries.

And they argued that inherently by restricting supply of longer treasuries in the market, that results in price going up and yields going down on the 10-year treasury. So she was cheating. She was cheating, right? She was creating more fiscal space. Right. There's a lot of people who disagree with that, right? While the fundamentals are there, if you look at the historical average...

Jen Yellen was issuing T-bills alongside the historical average, right? The maturity of the profile was not out of the range of normal. So it's a question of whether or not that was actually happening. But either way, when Scott Besant came into office, he originally said he wanted to reverse this, but we're two months in and he has no plans to reverse it. Yeah. Actually, he likes issuing a lot of short-term debt.

as it turns out. He's actually- And he said that he plans to continue doing so. Until market conditions change or something has changed. And interestingly, it was pointed out to me by Darrell Duffy, a professor at Stanford, that he's almost doubled down. He's actually keeping the quantity, the dollar quantity of long-term treasuries stable.

But at the same time, we have a deficit that's growing. So proportionally, you have fewer long-term treasuries in your borrowing versus what Janet Yellen was doing. Look, I think it's important here. There's a lot of technical terms flying around here. Let's take a step back and see this situation with the simplicity that is actually there. Trump administration wants to spend money on a tax cut, wants to fund a tax cut.

It is worried, as any presidential administration that wants to spend money worries, that if they spend more than the bond market likes, yields on bonds spike and it becomes unaffordable for the United States to finance the administration's plans. Yeah. Borrowing costs go up. Go up. And it costs so much more to pay that debt back.

We're already spending something like half the budget on interest expenses anyway. The deficit got wildly out of control over the last four or five years, et cetera, et cetera. So, Bessette is in the hot seat. How do you control the price of the biggest, most liquid market in the world, which is the market for US treasuries? And one way he's discovered-

Is by issuing more short-term debt. Yes. In theory, that lowers the yield, so that lowers the borrowing cost. But that could be a bigger issue if there is a secular rise in the yields, right? If Republicans still push for this tax cut, and if the bond market really doesn't like it, you could have a huge jump in yields later this year.

The problem there is then that makes borrowing going forward that much more expensive. So theoretically in this moment, you have a choice. Do you want to continue to theoretically suppress yields right now by continuing the practices of Janet Yellen? Or do you want to lock in what right now is a relatively high rate of four and a bit percent on long-term treasuries versus what could be much higher in a couple of months?

In short, Besant is making a bet on the direction of yields. Which is always a risky business. Always a risky business. He is betting that he can issue more long-term debt later at an acceptable yield.

One way in which this is playing with fire is that all of this stuff is quite alien to this market that, as we were saying, is supposed to be risk-free, it's supposed to be boring, it's supposed to be really easy. There's a lot of complication getting injected here. And my worry is that the next time something bad happens to the US economy, now normally something bad happens to the US economy, people buy treasuries, precisely because they're very, very safe and boring. If you take away that safety and boringness, I

I think you're chipping away at this kind of impulse that you have through the market where people buy US government bonds when bad stuff happens.

So I think there's a good chance that, you know, you look a few months down the line, you're going to have another argument about the U.S. debt ceiling, right? You're going to be reaching the limits of how much you can borrow. You might have to shut down the federal government. This argument comes around every few months. Well, you've already reached it, right? So the debt ceiling was essentially reinstated in January. So we really only have about eight months until the treasury runs out of the money it can actually operate the government with. So this conversation is going to have to happen before the end of the summer.

Yeah. And previously, when the market gets nervous, as I say, they buy treasuries. I just don't think that that's necessarily going to happen this time around. And then you might feel the fire of higher borrowing costs rippling through the U.S. I think that is possible. But I will say, in defense of the poor old United States, Katie...

a country you're always very mean to, that if you look at a long-term chart of the 10-year treasury yield, it's not going bananas. Basically, since late-ish 2022, we're going sideways at around 4%. And if you just look at that chart, like rates are higher now,

inflation seems to be higher, the natural rate of interest maybe has risen, but we're banging along at around 4% plus or minus, which in the long sweep of history is not a crazy interest rate.

And it doesn't look that volatile, really. But at the same time, we have a rise in the share of debt as US GDP over the past two years. And if we're to have a big tax cut hitting around the same time that we have slower GDP growth, which is very possible, then that could really spook the market. Borrowing will be so much higher relative to GDP than people are used to, or at least are okay with outside of a special event like COVID.

So just going back to where we started, Mar-a-Lago Accord, almost certainly not going to happen in the form that has previously been sketched out. But, but, but, but, but, even though elements of this are sort of self-contradictory and kind of pretty out there...

Again, going back to this story that broke yesterday about how the administration is discussing live military exercises on Signal. This is an administration that does things differently. I think it's reasonable to say. Would you rule out any kind of move to try and achieve some of these policy aims around, you know, really aggressive suppression of yields or around really trying to push the dollar down? Well, look,

The bond market, at least according to some reports, is starting to take this idea seriously. There was a Bloomberg story talking about how the slogan that used to be don't fight the Fed in the bond market is kind of don't fight the Treasury. In other words...

the market has noticed how laser focused the administration is on keeping yields low, the sense they'll do whatever needs to be done. And that may be having an effect on the bond yield already. Yeah.

I think that's reasonable. What can they do? That's a whole other discussion. I don't think it's very easy. Huge liquid market, it won't jump through a hoop just because they tell it to. And if you believe in the quote unquote QE by other means of increasing the issuance of short bills, they've kind of already made this bet on the treasury market that yields will remain low as Rob said earlier. Again, this is already an action they plan to keep it in action for a couple months.

So they've already taken some concrete steps if you believe that this actually has an effect on the market that they have accused it of. Yeah, yeah. But maybe, just maybe, we can all now shut up about the Mar-a-Lago Accord. I mean, I doubt it, but I think it's a worthy effort. We're going to shut up about everything and be back in a sec with Longshot.

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Alrighty, now it's time for long short, that part of the show where we go long a thing we love or short a thing we hate. Guys, you know the drill. Rob, let's start with you. I'm just going to continue the conversation we just had. I'm going to go ahead and go short the 10-year treasury bond. It's going to be choppy in the second half of the year.

And my guess is we see that bad boy cross, I don't know, four and a half percent yield, something like that. You mean you're short the price? I'm short the price. And that means I think yields are going to go up just because there's a lot going on. We have to pass new tax cuts. We have the debt ceiling. The whole thing is going to be contested in Congress. Yeah.

A lively ride for the Treasury in the second half of this year. You are never going to be added to the policy WhatsApp group now.

Aidan, what about you? I am long the oil price. Yesterday, Donald Trump essentially put a sanction on Venezuelan oil by threatening tariffs on anybody that imports Venezuelan oil. That, among other moves, like going after Iranian tankers, suggests that he doesn't actually want... He's more concerned with boosting US production of oil than actually lowering the broader energy prices around the world. So I'm gonna say long oil price.

Nice. Well, just to break the finance bro thing, I'm going to be long of a story about two young men who broke a Paddington statue, Paddington the bear statue. They were told by a judge that they are the antithesis of everything the bear stands for. I hope they go to an adorable little prison. And they make marmalade sandwiches for all the prisoners. Yeah.

These guys, they're two guys. They're 22. This thing happened at two o'clock in the morning. I think we kind of get the vibe. It was obviously a very silly thing to do, but this kind of elevation of Paddington the Bear towards some kind of semi-religious iconography, I think is quite...

quite odd. But we can all agree Paddington 2 is a perfect movie. It's proof, though, that the Brits can be silly, just like you Americans. Not quite to the same degree, but nonetheless, you don't mess with Paddington. Listeners, please do not vandalise anything between now and Thursday. We will be back in your ears then.

Unhedged is produced by Jake Harper and edited by Brian Erstadt. Our executive producer is Jacob Goldstein. We had additional help from Topher Forges. Cheryl Brumley is the FT's global head of audio. Special thanks to Laura Clark, Alistair Mackey, Greta Cohn and Natalie Sadler. FT Premium subscribers can get the Unhedged newsletter for free. A 30-day free trial is available to everyone else. Just go to ft.com slash unhedged offer. I'm Katie Martin. Thanks for listening.