NEWS + VIEWS – 02/10/2026
MARKETS
Over the past week, global share markets have been dominated by rising bond yields, inflation concerns and shifting expectations for interest rates. US equities have been volatile, while European markets fell more sharply as government bond yields rose. Oil prices have remained volatile amid uncertainty around the US–Iran conflict, adding to inflation concerns. Strong US economic data and resilient corporate earnings have provided some support, while ongoing enthusiasm around AI has continued to underpin parts of the technology sector.
In Australia, the ASX 200 fell sharply on Thursday and reached a four-month low. The Reserve Bank raised its cash rate by 0.25% to 4.60%, following persistently high inflation. Falling oil prices hurt energy stocks, while concerns about higher rates, weaker housing conditions and the broader economic outlook weighed on banks and property companies.
THE MOVES THAT BACKFIRED ON TRUMP
In the early days of President Trump’s second term, his economic advisers laid out a simple theory: Show the bond market that Washington was serious about closing its gaping deficits and long-term interest rates would fall on their own. Chief economics correspondent for The Wall Street Journal Nick Timiraos writes that it hasn’t worked out that way.
Inflation is rising, the Federal Reserve is raising rates, and the 10-year Treasury yield is well above where it stood on Inauguration Day, when the new team blamed high rates on runaway Biden-era spending. This week, that yield reached the highest level since 2002 as investors weighed a resilient economy, prolonged energy disruptions that threaten to aggravate price pressures and a central bank losing patience waiting for them to fade.
The White House theory rested on fiscal restraint that never arrived and overlooked how much of Trump’s own agenda would feed the price pressures now pushing rates higher. Tariffs raised the cost of imported goods, the war with Iran sent oil and diesel prices soaring, and immigration restrictions shrank the labour force.
The government’s interest payments on its debt topped $1 trillion for the fiscal year that ended this week, more than it spends on the military. That leaves less room to respond if the economy stumbles, and if inflation doesn’t cool, the Fed may have to slow the economy to bring it down. The economy has been resilient; unemployment is near 4%, consumers are spending, and growth has been solid. But that strength is part of the problem.
When demand is sturdy, businesses can more easily pass higher fuel costs on to customers, and workers can press for pay rises to keep up. That makes it more likely that an energy shock spreads into broader inflation, giving the Fed more reason to raise rates and investors more reason to demand higher yields.
Some of the pressure is outside Trump’s control. The AI building boom, which the White House has cheered, is driving up the cost of chips, electrical components and power equipment. It is also competing with the US government for borrowed money. However, if not for the war, the inflation numbers would be very different, with inflation likely back at the Fed’s 2% goal. In August, the core consumer price index, which excludes food and energy prices, posted its slowest 12-month growth in five years.
SLAYING THE DEFICIT
Treasury Secretary Scott Bessent made deficit reduction a centrepiece of his pitch during the 2024 campaign. Then a hedge-fund manager advising Trump, he championed an agenda called 3-3-3: cutting the deficit to 3% of GDP, lift inflation-adjusted growth to 3% and increase domestic energy production by the equivalent of three million barrels of oil a day.
Once Trump took office, advisers trotted out a series of fixes for the deficit. First came the Department of Government Efficiency, which Elon Musk said could find $2 trillion in savings by eliminating wasteful spending. It delivered very little. Then came tariffs, which brought in record customs revenue until the Supreme Court ruled this year that Trump lacked the authority to impose many of them.
In August, Bessent defended his surprise decision to at least double the Treasury’s purchases of long-term bonds after the 30-year yield hit its highest level since 2007. He said the move was justified because yields had run ahead of the economy’s fundamentals. Buying back older bonds shrinks the supply of long-term debt in the market, which can push yields down. Investors read the move as an effort to contain the government’s borrowing costs. Yields fell briefly but then climbed within a day.
Bessent also said that a deficit-reduction plan would be unveiled within days, though he later said it wouldn’t be released for weeks or months. Trump, meanwhile, pledged $5,000 for every adult if Republicans keep control of the House and Senate in the midterm elections. Twenty months in, the 3-3-3 scorecard is mixed. Energy output has risen and growth has been solid, but the deficit is set to rise to a level that is at least twice Bessent’s target.
TAMING INFLATION
The deficit doesn’t rank high among Trump’s priorities. His main preoccupation has been Fed rate cuts, which he saw as a shortcut to shrinking the government’s interest bill. Within weeks of his return, Trump was again pressing then-Fed Chair Jerome Powell to drop rates, as he had in his first term.
During 2025, Fed officials cited concerns that tariffs might stoke new price pressures after a punishing three-year fight against rising prices appeared to be paying off. The Fed ultimately lowered rates three times late last year, citing signs of a weakening labour market and a judgment that tariff-driven price pressures would prove short-lived.
In May this year, Trump replaced Powell with Kevin Warsh, who he expected would deliver lower rates. Last month, Warsh’s Fed raised rates for the first time since 2023. The Iran war and an economy running on the AI boom drove that decision. The Fed spent much of the year anticipating that energy price increases from snarled shipping corridors in the Middle East would subside quickly. When that didn’t happen, the Fed had to recognise that inflation may be more persistent than expected and is now doing something about it.
The war’s effects could spill beyond the gas pump because diesel powers the farm equipment that grows food and the trucks that deliver it to stores and restaurants. Having begun to raise rates, the Fed has left investors guessing how far and how fast it will go, adding to uncertainty that is pushing up long-term rates.
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