Trump Administration Economy In Focus

Trump Administration Aims

The main aims of the Trump administration are to deliver real GDP growth of 3% per year, lower annual budget deficits to 3% of GDP, and increase U.S. oil production by 3 million barrels per day.

The Trump administration believes these policies will spur economic growth, ease inflationary pressures, and lower borrowing costs for both the government and American families.

As noted in previous posts, the Trump administration is laser-focused on lowering the 10-year yield.

Any perception that the administration is losing control of the long end of the yield curve is a significant risk to their narrative.

Bond prices will be a key factor in determining whether the Trump administration will be successful in lowering the 10-year yield.

Bond yields are determined by the price of government bonds, which is determined by supply and demand.

The higher the price of the bond, the lower the yield and vice versa.

In effect, if the administration wants to lower bond yields and interest rates, it must reduce the supply of bonds, increase demand, or both.

Supply

The U.S. Treasury issues bonds to fund U.S. government spending.

Increased government spending results in increased bond issuance. If that increased supply of bonds is met with the same demand, bond prices fall, and yields rise.

The Trump administration wants to reduce the supply of bonds by lowering annual budgets. The Department of Government Efficiency (DOGE) is primarily focused on this goal.

Note: GDP growth over the last couple of years has been driven by government spending. If the administration cuts government spending, that will negatively impact GDP.

Demand

GDP is a factor that influences bond demand. The higher the GDP, the more demand there is for bonds, assuming that factors like inflation are in control.

That is why the Trump administration is focused on delivering real GDP growth of 3% per year.

However, as noted above, GDP growth over the last couple of years has been driven by government spending, which is now the focus of DOGE.

The demand for bonds can come from anywhere, including the Treasury and the Federal Reserve. The Federal Reserve can and has bought U.S. bonds as part of quantitative easing.

However, the demand for U.S. bonds has been falling due to concerns about government spending, inflation, and fears of confiscation linked to sanctions. The fall in demand risks lowering the bonds’ value.

Oil And Geopolitics

That is why the Trump administration wants to increase oil production. More oil production means less inflation and more demand for bonds.

In addition, the focus on reducing geopolitical uncertainty (Middle East and Ukraine) could increase demand for bonds.

If successful, the Trump administration anticipate increasing global demand for government bonds.

So will they be successful? Time will tell.