Bonds’ rally on Bessent pick for Treasury shows there’s big tension between Trump and the markets

The market reaction to President-elect Donald Trump’s nomination of hedge-fund manager Scott Bessent to be the next US Treasury secretary is affirming investors’ fervent hope for the incoming administration: the primacy of market-friendly over disruptive policies.

Personnel, to a certain extent, is policy, so in appointing a seasoned Wall Street vet to this position, it’s a reminder to investors how much Trump cares about the stock market. Remember that Trump’s former Treasury Secretary Steven Mnuchin said in 2017 that the administration viewed the stock market as its “report card.”

“Bessent is unanimously viewed as the voice of reason choice across the spectrum,” wrote Brent Donnelly, president of Spectra Markets. “Everyone from Steve Bannon to Jamie Dimon to Jason Furman to Dan Loeb approves.”

It’s no surprise that Wall Street thinks that one of the presumptive beneficiaries of the incoming administration will be, well, Wall Street (more Park Avenue boutique investment banks, if we’re being specific). A Goldman Sachs basket of financial stocks that are the perceived winners under this new regime is up nearly 14% since Election Day, and is far outperforming the S&P 500 on Monday, as well. This group includes institutions like Moelis & Co. and Evercore, which stand to gain from a more permissive M&A backdrop, as well as Bread Financial, Capital One, and American Express. 

But the key appeal of Bessent, in investors’ eyes, seems not to be what he can do for them, but rather what he might be able to keep Trump from doing to them.

Bessent reportedly won the president-elect over by pitching a “3-3-3” plan: that is, looking for 3% real GDP growth, decreasing the government deficit to 3%, and increasing US oil production by 3 million barrels per day, and has urged a gradual approach to the introduction of any tariffs. 

The perceived Overton policy window for Trump 2.0 gets smaller, the thinking goes, with Bessent at Treasury. Ten-year US Treasury yields are tumbling, down about 14 basis points on Monday in their biggest one-day drop since the stock market hit the skids in early August.

“The bond-friendly logic is relatively straightforward and maintains that Bessent will keep a leash on deficits and take a thoughtful approach to tariffs,” wrote Ian Lyngen, head of US rates strategy at BMO Capital Markets.

Less is more, in some cases. Bessent is on the record articulating a less muscular fiscal policy than is currently in place and a less aggressive trade policy than others in the administration or the president-elect himself. If you get less of the Bad Things (trade barriers and inflation), there are positive side effects: namely, there’s more scope for interest rates to fall and US housing to get its mojo back. All else equal, lower rates are going to support new supply in the housing market and more resale activity. 

The elevated cost of housing — both in terms of high prices and high interest rates — has been a millstone around the neck of consumer sentiment. The share of Americans who say it’s a bad time to buy a home because prices or interest rates are too high has spent the last 2.5 years at a 40-year high.

A tentative sign that investors hope Bessent’s lighter policy touch will carry the day and unlock upside for a beaten-down part of the economy: homebuilders are standout performers on Monday amid the sharp drop in rates, with the iShares Home Construction ETF up about 5.5%.

But this strong reaction to the Bessent pick also underscores a bit of tension between Trump and investors. The market wants Trump to deliver on one policy priority where he and his appointees have lots of discretion — deregulation — and soft-pedal another area where he also has some say-so — trade policy. 

The more Trump does on fiscal policy and trade policy, the greater the risk that relatively high interest rates weigh on activity in the politically and economically critical real-estate sector.