How U.S. Fiscal Policy Is Shaping Treasury Yields, Inflation, and Debt Issuance

The Trump administration, as of late 2025, has adopted a series of deliberate actions aimed at preserving a fragile equilibrium in the U.S. bond market. Spurred by a sharp backlash following its sweeping tariff announcement on April 2—dubbed “Liberation Day”—which sent Treasury yields spiking, the administration has adopted more cautious policy design and messaging to avoid another market rupture. These adjustments include a tilt toward short-term Treasury issuance (T-bills), expanding buybacks of long-dated debt, and public assurances from Treasury Secretary Scott Bessent that keeping yields in check is central to the federal borrowing strategy. [1], [2]

Underlying these decisions is investor concern over fiscal sustainability: the U.S. is running annual deficits around 6% of GDP with a debt-to-GDP ratio exceeding 120%. Many got alarmed again in November, when signals of increased long-dated issuance and legal threats to tariff revenues reignited fears about debt servicing costs. These events caused the benchmark 10-year yields to spike by several basis points. [1], [3]

Another dimension is how the administration is engaging with bond market participants and adapting policy signals accordingly. For example, Treasury has discreetly canvassed investors about potential Federal Reserve Chair candidates—reflecting significant concern about the perceived independence of key institutions when it comes to monetary policy. Furthermore, stablecoins and the broader crypto-linked demand for T-bills is being positioned as an emergent force in Treasury demand. [1], [6]

However, despite these countermeasures, the “truce” appears uneasy. Inflation expectations and Fed policy trajectory remain core risks. If inflation picks up unexpectedly or the Fed shifts toward a hawkish stance, long-term yields could rise sharply. Similarly, reliance on short-term debt exposes the U.S. to roll-over risk and higher refinancing costs if rates increase. These vulnerabilities suggest that strategic missteps—a tariff escalation, fiscal overreach, or foreign holders’ retreat—could quickly erode trust. The administration’s ability to maintain credibility is being tested more than ever.