Trump's "war" with the Federal Reserve has permanently damaged the credit of U.S. Treasury bonds

Concerns about the independence of the Federal Reserve are spreading, and investors are accelerating the sale of U.S. Treasuries.

In recent weeks, due to Trump's repeated pressure on Powell to cut interest rates, concerns about the independence of the Federal Reserve have intensified the sell-off of U.S. Treasuries. This week, the yield on the 10-year U.S. Treasury bond briefly surpassed 4.4%, approaching the levels reached earlier this month during market turmoil.

This concern has pushed up the risk premium on U.S. Treasury yields, leading to doubts about their credit as a safe-haven asset. Relevant data shows that compared to safe German government bonds, investors are receiving a premium of about 1.9 percentage points for holding U.S. Treasuries, which are considered to have higher risk, up from less than 1.3 percentage points earlier this month.

Andrew Chorlton, Chief Investment Officer of Fixed Income at M&G Investments, warned:

“Once the words are out, even if retracted, people will still have doubts: What will the next surprise be?”

Robert Tipp, Global Head of Bonds at PGIM Fixed Income, pointed out that policy volatility, including pressure on the Federal Reserve, is affecting the prices of U.S. assets across the entire financial market:

“We have seen it in currency fluctuations, in relative bond movements, and in relative stock market movements; it is taking a toll.”

If the Federal Reserve really shifts, U.S. Treasuries may decline further

Investors are concerned that Trump may successfully shift U.S. monetary policy to a more accommodative stance on inflation to achieve his goal of lowering interest rates.

Some analysts point out that if the market perceives this shift, even if Trump has retracted the threat to fire Powell, U.S. Treasuries, especially long-term bonds, will be adversely affected.

Matthew Raskin, Head of U.S. Interest Rate Research at Deutsche Bank, believes that the president may continue to undermine the independence of the Federal Reserve by nominating successors in advance, creating a "shadow chairman" that influences monetary policy expectations while Powell is still in office.

Currently, speculation about potential candidates has begun, with former Federal Reserve Governor Kevin Warsh, who was considered for the position of Treasury Secretary, seen as a possible alternative. Warsh harshly criticized the Federal Reserve's policies last year but has remained largely silent on decision-making recently.

Capital Economics wrote in a report: “If Warsh wants the position, he will have to compromise his more traditional Republican monetarist views and pledge allegiance to Trump and low interest rates.”

The report also mentioned that Kevin Hassett, Director of the National Economic Council under Trump, is another potential alternative.

Campbell from DoubleLine stated that the appointment of the next Federal Reserve chair is “fraught with risk,” especially as global investors “begin to question the fundamental basis of their investments.” Campbell warned that nominating and hinting at non-traditional candidates—or paving the way for a shift in Federal Reserve policy—could trigger further declines in U.S. Treasuries relative to other bond markets.