Donald Trump’s war of words with Jay Powell is likely to do lasting damage to the $29tn Treasury market, even after the US president backpedalled on his apparent threat to fire the Federal Reserve chair, big investors have warned.
Trump this week said he had “no intention” of firing Powell, but reiterated his complaint that the Fed has been slow to cut borrowing costs. With Powell’s term as chair set to end in May 2026, the episode has fuelled investor fears about Fed independence and the path of US monetary policy.
“Once you say it, you’ve said it, and while you can walk it back, in the back of people’s minds is, what’s the next surprise?” said Andrew Chorlton, chief investment officer for fixed income at M&G Investments. “If your comfort level around the independence of the Fed . . . is being reduced, you expect to pay more for it.”
Growing worries about central bank independence — with the president ratcheting up his calls for lower rates in recent weeks and saying the end of Powell’s term “cannot come fast enough” — has fuelled a sell-off in Treasuries. That took the 10-year Treasury yield above 4.4 per cent this week, heading towards levels reached in the market tumult earlier this month.
There is a lingering fear in the market, say big Treasuries investors, about the Fed’s independence, including whether the president will make an unorthodox pick for the chair’s replacement.
That was creating a so-called risk premium in Treasury yields, investors said, keeping them higher than they would be otherwise. Even after recovering, 10-year yields were at 4.34 per cent on Thursday.
This premium investors are paid to hold Treasuries because of their perceived higher risk compared with safe German Bunds is about 1.9 percentage points, up from less than 1.3 percentage points earlier this month.
Debate over the Fed’s independence has added to concerns that have knocked Treasuries prices in recent weeks, including worries over government borrowing and the fallout from Trump’s trade war, with investors already questioning the US bond market’s haven status.
William Campbell, a portfolio manager at DoubleLine Capital, said that government “over-reach” into the central bank risked “eroding” a fundamental pillar of investor sentiment and drew parallels with crises in emerging markets, referring to Turkey’s experiment with unconventional monetary policy a few years ago.
“The talk of firing Powell only makes the market demand more risk premium,” he said. “Look at what happened to Turkey.”
Tobias Adrian, the IMF’s top official for markets, told the Financial Times on Monday that “the track record, in terms of achieving stability, is much stronger when central banks are independent”.
While he declined to comment directly on Trump’s recent remarks on Powell, he added: “Independence provides stability and undermining independence we think would create uncertainty.”
The risk premium on Treasuries is typically very low because it is the deepest and most liquid bond market in the world and used as the primary global reserve asset.
Robert Tipp, head of global bonds at PGIM Fixed Income, said policy volatility, including the pressure on the central bank, was weighing on US asset prices across financial markets.
“We have seen it in currency movements, we’ve seen it in relative bond movements, we’ve seen it in relative stock market [moves]. It’s exacting a toll.”
The concern among investors is that Trump manages to shift US monetary policy to be softer on inflation, in order to get his goal of lower interest rates. Long-dated bonds would be especially damaged if the market sensed such a shift.
Even as Trump has backed off from his threats to fire Powell, analysts suggested that the president could continue to hamper Fed independence. It is possible that he may nominate a successor early, creating a “shadow chair” who influences monetary policy expectations while Powell is still in office, said Matthew Raskin, US head of rates research at Deutsche Bank.
Speculation has already begun among rates analysts and investors about who could be chosen, with Kevin Warsh, the former Fed board member who was considered for the Treasury secretary role, being viewed as a possible replacement. Warsh was a fierce critic of the Fed’s policies last year but has remained largely silent on recent decisions.
“If Warsh wants the job, however, he’s going to have to compromise his more-traditional Republican monetarist views and pledge his allegiance to Trump and low interest rates,” wrote Capital Economics in a note before the president backtracked. They also named Kevin Hassett, director of the Trump’s National Economic Council, as another potential replacement.
DoubleLine’s Campbell said the appointment of the next Fed chair was “fraught with risk”, especially at a time when global investors were “starting to question the fundamental underpinnings of their investments”.
Investment managers warned that signalling an unconventional replacement — or laying the ground for a shift in Fed policy — could prompt further bond price falls relative to other bond markets.
“In this environment it is definitely possible and it is very difficult for somebody to lie down on the tracks ahead of that locomotive if it looks like that is coming,” said PGIM’s Tipp. “We’re definitely vulnerable to that [risk].”
Additional reporting by Claire Jones in Washington