Trump 2.0 is borrowing a page from the Clinton administration's playbook, specifically the one in which Robert Rubin and James Carville warned Clinton that he had to respect the power of the Bond Vigilantes and maintain fiscal discipline. US Treasury Secretary Scott Bessent yesterday said that he and President Trump are less concerned with the federal funds rate (FFR) and instead are hoping to contain the 10-year Treasury yield. Bessent's message to the Bond Vigilantes was that he has explained to President Trump that they have the power to stymie his fiscal agenda.
That makes sense to us, especially since premature Fed rate cuts helped boost long-term yields, and therefore borrowing costs, over the past six months. The Bond Vigilantes protested the lack of monetary discipline.
A major component of the administration's economic plan is to bring down oil prices. As long as Trump 2.0 can increase oil supply enough to lower oil prices, the tight correlation between breakeven inflation and crude oil prices suggests this strategy might work (chart).
As long as bond yields are falling for good reasons (i.e., disinflation) and not bad ones (e.g., a recession), then that's a positive setup for the stock market.
