In an all-encompassing interview with Bloomberg, U.S. Treasury Secretary Scott Bessent emphasized the Trump administration’s strategic focus on maintaining low 10-year Treasury yields. This approach marks a significant shift in economic and fiscal policy, which previously focused almost exclusively on pushing the Federal Reserve to cut its benchmark interest rate.

Since the Fed began cutting interest rates in September 2024, 10-year Treasury note yields spiked from 3.6% in September to almost 4.8% in January. In the month since the last Non-Farm Payrolls report and the change in administration, yields have rallied by 30 basis points (bps), signifying increased demand.

Since taking office in January, the Trump administration has taken significant steps to demonstrate a commitment to strengthening U.S. leadership in innovating financial technologies. His crypto-focused executive order aims to establish regulatory clarity for digital assets and secure America’s position as a global leader in the digital asset economy.

Over the past week, the Senate Banking Committee and the House Financial Services Committee held hearings on the aggressive enforcement actions and regulatory overreach during the Biden Administration. Commonly referred to as Operation Choke Point (OCP) 2.0, industry experts testified about how OCP 2.0 stifled innovation and growth in crypto and other “politically disfavored industries,” by providing little or no regulatory guidance and requests to “pause” banking activities with crypto companies, resulting in debanking.

Regulatory and legislative policy measures that foster innovation in digital financial technologies could work in tandem with fiscal policy to pave a path toward a more efficient U.S. financial system with positive implications for consumers.

The Role of Fiscal Policy

Secretary

Bessent’s comments highlight the importance of long-term interest rates in driving economic stability and growth. While the mainstream financial press focuses much of its attention on the U.S. stock market, the 10-year Treasury note is a cornerstone for the whole U.S. financial system.

The benchmark reflects investors’ sentiments about the U.S. economy’s future and influences everything from mortgage rates to corporate borrowing costs. This relationship underscores the importance of maintaining low 10-year yields to support consumer spending and economic growth.

The 10-year note simultaneously serves as a bellwether for sentiment about general global stability. Backed by the full faith and credit of the U.S. government, U.S. bonds are considered a “flight to quality” investment. In times of global economic uncertainty or market volatility, investors sell riskier investments to buy U.S. Treasuries.

Price vs Yield

While stock investors talk about their assets in terms of price, bond mavens speak in terms of yield, which moves inversely to price. While this can be confusing for non-fixed income thinkers, bond markets, like all markets, respond to supply and demand.

Spend enough time on any trading floor and you’ll hear the most logical reason why any asset rallies (for 10-year notes, this means goes up in price, down in yield)– more buyers than sellers.

Innovation in Digital Financial Technologies: Catalysts for Efficiency

During its first month, the Trump administration has taken significant steps to promote innovation in digital financial technologies. Blockchain technology and cryptocurrencies are at the forefront of FinTech innovation.

Blockchain, a decentralized ledger technology, offers transparency, security, and efficiency in transactions. Cryptocurrencies, built on blockchains, provide new vehicles for digital transactions and financial inclusion.

Correlation Between Innovation and the Bond Market

For many, the correlation between technology innovation and the bond market can be elusive. While experts in both fields can point to the benefits in their own domain, the path to mutual benefit can be longer in duration (bond pun most definitely intended).

Blockchain technology can enhance the transparency and security of financial transactions, reducing the risk of fraud and improving investor confidence. This increased confidence can lead to greater demand for U.S. Treasury securities, including the 10-year note, thereby supporting lower yields.

The integration of blockchain and cryptocurrencies into the financial system can streamline payment processes, reducing transaction costs and settlement times. This efficiency can enhance liquidity in the financial markets.

Stablecoin development has been one of the fastest growing areas in the field. By mid-2024, there were over 180 stablecoin projects, a 574% increase over three years. Over 98% of the $230 billion stablecoin market is USD-denominated

If USD-denominated stablecoin issuers were aggregated and classified as a single investor, they would be one of the top 15 investors in U.S. Treasuries, somewhere between India and Brazil.

Increased confidence in the United States and the collateralization of stablecoins with U.S. Treasuries could both be catalysts for increased demand, driving prices higher and yields lower.

In turn, borrowing costs for consumers and corporations would decrease, making it more affordable to purchase homes and other goods and finance major capital expenditures.

The Long Game

Whether it’s technology or Treasuries, the ramifications of policy actions today may take time to manifest themselves. Like their namesake, 10-year Treasury notes reflect market expectations at that point in time. The uncertainty of such a long time horizon is reflected in the term premium, the extra compensation (higher yield) paid to investors for their investment in longer term bonds.

Treasury Secretary Bessent’s comments are aligned with technology policy mandates and reflect a nuanced understanding of the interconnectedness of fiscal policy, financial innovation, and market dynamics.

By simultaneously encouraging digital financial technologies (cryptocurrency and blockchain) and implementing supportive fiscal policies, the Trump administration aims to create a favorable environment for economic growth driven by innovation. The focus on maintaining low 10-year Treasury yields is a strategic move that can benefit consumers, businesses, and investors alike. As we navigate the complexities of the modern economy, the integration of advanced technologies and sound policy measures will be key to sustaining long-term prosperity.

The N.W.T.’s finance minister is proposing a $2.5-billion operating budget for the upcoming year, which she said contains “nothing dramatic” and is aimed at being prepared for challenges that may arise during a time of uncertainty.

“Assuming that there will be something unpredictable happening is probably the most stable prediction I can make,” Caroline Wawzonek told reporters Thursday morning. She tabled the budget in the Legislative Assembly a few hours later.

The territory expects to bring in $2.7 billion in revenues in 2025-26, which it says is up two per cent from last year. Expenses come to $2.5 billion — up from last year’s $2.2-billion plan — leaving an expected operating surplus of approximately $170 million. That surplus will help pay for the territory’s capital projects in the coming year.

Wawzonek said nearly a third of the budget is spent on the healthcare system, and $64 million will be spent on improving access to it for things like front-line health support, administration capacity and delivery improvements.

Housing and homelessness is another area of spending she highlighted. The territory is set to spend $3.7 million on a strategy for homelessness in Yellowknife, $2.9 million for a public housing program and $809,000 for the Transitional Housing Addictions Recovery Program.

Wawzonek said the territory is also trying to reduce regulatory burdens in the mining sector.

A snapshot of the economy

In a presentation to reporters on Thursday morning, Bill MacKay, the finance department’s deputy minister, said the territory’s GDP is at its lowest point in a decade.

Most of that, he said, is driven by the mining sector — but he cautioned that mining doesn’t drive employment in the territory and therefore isn’t the best metric of the N.W.T. economy.

The N.W.T’s three diamond mines are expected to end production in 2030.

Rough diamonds are mainly exported to Belgium and Botswana, he said. The territory exports a very small amount of goods to the United States which, in 2023, amounted to $6,000 and included things like fur products and traditional crafts.

Bill MacKay, the deputy minister of the N.W.T.’s Department of Finance, gave reporters a presentation on the budget Thursday morning, before the finance minister tabled it at the Legislative Assembly. (Liny Lamberink/CBC)

Even so, MacKay said the territory would not be immune to the economic impacts of a tariff war with the United States. Anything bad for the Canadian economy, he said, would be “detrimental” to the N.W.T.

MacKay also said some smaller industries are growing, such as motion picture, sound recording and tourism, as well as traditional economies like trapping and commercial fishing.

Wawzonek said Hay River is at the “front line” of the fishing rebound, but Fort Resolution is involved as well, while the Beaufort Delta is starting to see its tourism industry “starting to flourish.”

Midwifery expansion cut

Things that are expected to be cut in the upcoming fiscal is a planned expansion of the midwifery program in Yellowknife that was expected to cost $418,000. The Department of Environment and Climate Change’s operations and maintenance budget is also being reduced by $425,000.

The territory said it was also still expecting to save $2.7 million by closing the men’s unit of the Fort Smith jail — something that came to light ahead of last year’s budget, but was then delayed.

The N.W.T. government has a goal of freeing up $150 million annually, by generating more revenue and finding places to cut spending. However, it fell short of that goal this year, ultimately freeing up about $106 million.

It also wants to pay down its short-term debt by $150 million by the end of March 2028, but for this latest budget at least, the territory’s short-term debt continues to climb.

Wawzonek said the government would still like to hit its goals, but doesn’t want to create instability in the public service sector or in its service to communities to make it happen.

She also emphasized that the territory had hit a separate financial goal: to pay for its capital plan using an operating surplus. “It’s pretty rare that we would pay for our capital plan … without taking on debt,” she said.

The territory said it is also still waiting to hear back from the federal government about increasing the N.W.T.’s federal borrowing limit.

Headlines

• The full array of financing options is finally available again for financial sponsors
• Financing new deals will take centre stage as M&A markets show signs of recovery
• Sponsors will curate bespoke loan packages to maximise flexibility and pricing
• Sponsors will capitalise on opportunities to bring down financing costs across their portfolios

Private equity sponsors enter 2025 with a strong appetite to strike deals and take advantage of fully functioning debt markets.

The post-pandemic cycle of high inflation and rising interest rates caused private equity and broader M&A deal activity to wane. As a result, a valuation gap has emerged—vendors have been reluctant to sell assets during the downturn, while bidders remain cautious about overpaying in an uncertain economic environment.

Europe recorded two years of rapidly declining private buyout dealmaking in 2022 and 2023, according to Mergermarket. Although activity has improved in 2024—the aggregate value of all private equity M&A in EMEA in 2024 (€268 billion) was up by approximately a third year-on-year from 2023’s total (€201.6 billion)—there is still a lot of ground to make up, particularly in terms of deal volume.

The pause in buyout deal activity has created a backlog of unexited assets, which are sitting in portfolios as sponsors wait for market conditions to improve. According to Bain & Co, buyout sponsors are holding approximately US$3.2 trillion of unsold assets in their portfolios, a record high.

Pent-up demand to spur sponsors and lenders

Dealmakers are increasingly optimistic about a rebound in European buyout activity in 2025, propelled by pent-up demand, falling interest rates and, crucially, more stable valuations.

According to Dealsuite, the average European mid-market EBITDA multiple moved up for the first time in two years during H1 2024, supporting a corresponding uptick in M&A activity, which was especially pronounced in Q2 2024. As momentum builds, sponsors will take advantage of the reopened debt markets to negotiate optimal financing packages for new transactions.

Europe’s cycle of rising interest rates between July 2022 and September 2023 effectively shuttered broadly syndicated loan (BSL) markets, forcing sponsors to rely on private credit and alternative solutions, such as NAV loans, to finance deals and portfolios.

However, confidence returned to the BSL markets and high yield in 2024, offering sponsors a broad array of financing options besides private credit and fund finance. Overall, both European syndicated loan issuance and high yield bond issuance nearly doubled year-on-year in 2024. Combined issuance for buyout deals also improved, reaching €40.5 billion, surpassing the total logged in 2023 (€21.5 billion), though still far below pre-pandemic levels. 

Financing tailored to fit

With all the financing channels reopened, sponsors are focussing on aligning deals with optimal funding sources.

High-quality borrowers requiring a substantial amount of debt will often find the best fit in the BSL and high yield bond markets, which can efficiently handle large-scale financings. Meanwhile, more complex or higher-risk borrowers—whether due to their higher levels of leverage or operational complexity—might prefer private credit, where lenders undertake more detailed due diligence (and can do so in relatively compressed timeframes) and are prepared to price in additional risk.

Sponsors will also increasingly blend different sources of debt to optimise capital structures. For example, in a BSL, a sponsor-backed borrower/issuer could raise euro-denominated debt in public markets and rely on private lenders to pick up sizeable tickets in any sterling-denominated debt they may require.

As sponsors select ideal structures for deals, competition among lenders will intensify. The BSL markets are sharpening execution and offer more flexibility, while private credit players are tightening their margins and offering increasingly flexible covenants to win over borrowers.

Portfolio priorities

Kickstarting buyout deal activity will be the primary objective of sponsors in 2025, but private equity firms are also keeping a close eye on existing portfolios. As interest rates continue to fall in Europe, refinancing or repricing borrowings at more favourable rates is high on the agenda.

European loan refinancing and repricing deal flow surged in 2024, driven by lenders’ willingness to put money to work, even at tighter margins compared to the prior year. During the past 12 months, sponsors have increasingly pivoted from more costly private credit facilities towards lower-margin BSL products, and have leveraged falling interest rates to negotiate coupon discounts with incumbent private credit providers. 

One can expect sponsors to continue seizing opportunities to cut borrowing costs as market conditions improve. After more than two years of relatively limited financing options, sponsors are eager to get back to striking deals and maximising their portfolio companies’ value. Debt markets are well equipped to support those ambitions in 2025.

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