Analysis-US Treasury rout tests Washington's tolerance for higher borrowing costs

By Gertrude Chavez-Dreyfuss and Nandita Bose

NEW YORK/WASHINGTON, May 24 (Reuters) - President Donald Trump's room to wage war while maneuvering on economic policy is being tested by a force largely beyond his control: the bond market.

Trump says Washington and Iran have been making progress on a peace deal in the three-month-old war. Still, over recent days and weeks, U.S. Treasury investors ‌have focused on the elusiveness of a deal and long-term consequences of the war, lifting yields well above 4.5% on the benchmark 10-year note.

Meanwhile, Federal Reserve officials looking to squash inflation ‌have been discussing the possibility of raising interest rates instead of cutting them as Trump has urged. And some Republicans in Congress are growing concerned at some of Trump's calls for spending ahead of the midterm elections which will decide whether they maintain thin control ​of the House and Senate.

Rising Treasury yields feed directly into borrowing costs across the economy, including mortgages, credit cards and business loans, and can cause financial stability issues. Bond investors said the administration would have to pay attention.

"The markets are showing him pain, and he has to figure out how to unwind that—and it's not that easy," said Greg Faranello, head of U.S. rates strategy at AmeriVet Securities in New York, speaking ahead of the latest signs of progress in talks. "We're already at levels that ultimately will spill over into mortgage rates and it's going to spill over into the housing market."

U.S. Treasury Secretary Scott Bessent and the White House both suggested that elevated yields ‌would prove temporary. Still, a White House official who was granted anonymity ⁠to speak candidly noted significant anxiety among staff over gasoline prices and where the bond market is headed, adding that nothing was causing more anxiety than fuel prices right now.

"I do think that if the administration is worried about higher yields, then trying to de-escalate the situation with calmer words is something they can do," said ⁠Shawn Snyder, economic strategist at Potomac Fund Management in Bethesda, Maryland. He added that market prices are responsive to comments from Trump about a resolution to the war.

On Wednesday, yields on U.S. Treasuries retraced some of their sharp run-up, after Trump said talks with Iran were in their final stage. Earlier in the week the 10-year yield touched 4.69%, the highest since January 2025. It has surged more than 50 basis points since the February 28 start of the U.S.-Israeli war ​with ​Iran, and was last at 4.56%. Reaction to the latest progress on peace is yet to be seen in the ​market.