The "steepening storm" of U.S. Treasuries is brewing! If Powell is dismissed, the yield on 30-year U.S. Treasuries may soar to 5.5%

According to the Zhitong Finance APP, a team of strategists from the international bank Deutsche Bank recently released a research report stating that if U.S. President Donald Trump is determined to remove Federal Reserve Chairman Jerome Powell through some rationalized judicial process, the independence of the Federal Reserve will be compromised, leading to a rise of over 50 basis points in the ultra-long-term U.S. Treasury yields—specifically, the 30-year U.S. Treasury yield. Meanwhile, the 10-year U.S. Treasury yield, which has recently seen a significant decline and is known as the "anchor of global asset pricing," will also enter an upward trajectory.

In recent weeks, the U.S. Treasury and dollar trading markets have been continuously troubled by the "Powell risk": whether U.S. President Donald Trump is about to replace Federal Reserve Chairman Jerome Powell by some means. Additionally, inflationary pressures caused by tariff policies persist, leading traders to even reduce the probability of a rate cut in September, with the 30-year U.S. Treasury yield briefly breaking the important 5% mark last week.

Many top global investment institutions, including Deutsche Bank, have stated that after intense debates in recent days regarding the Federal Reserve's monetary policy path shifting hawkish or dovish, as well as the potential replacement of the Federal Reserve leadership, the uncertainty faced by the market remains high, which may lead to continued discounted trading of long-term U.S. Treasuries, especially with the yields on 10-year and longer-term U.S. Treasuries likely to rise significantly at any time.

Due to the resilience shown in non-farm payroll data and other macroeconomic data, along with the tariff effects beginning to reflect in inflation data, expectations for a Federal Reserve rate cut have significantly cooled—from an anticipated cut of 75 basis points down to less than 50 basis points. Coupled with the potential for a substantial expansion of the government budget deficit following the passage of Trump's "Big and Beautiful" bill, and the expectations of a significant expansion of government fiscal budgets due to the defeat of the ruling coalition led by Shinzō Abe in the Japanese House of Councillors election, which has led to a sharp rise in Japanese long-term Treasury yields and spillover effects in the bond market, these factors have collectively intensified the recent upward pressure on U.S. Treasury yields. In particular, the 10-year U.S. Treasury yield, known as the "anchor of global asset pricing," and longer-term U.S. Treasury yields are likely to enter a significant upward trajectory, posing a major test for the global stock market, which has recently surged and reached new highs.

"Even if Trump denies that he will replace Powell in the short term, the uncertainty regarding the independence of the Federal Reserve remains high, which may cause long-term U.S. Treasuries to continue trading at a discount," stated the team of strategists led by Jay Barry from JP Morgan.

Is it really possible for the Trump administration to dismiss Powell in a 'reasonable way'?

The Deutsche Bank strategy team, including strategists Matthew Raskin and Steven Zeng, wrote in a client report that hedging against the risk to the independence of the Federal Reserve, as well as the scenario where massive U.S. government spending erodes monetary policy—one of the most obvious ways is to bet on a steepening U.S. Treasury yield curve, that is, betting on the widening spread between short-term and long-term U.S. Treasury yields. For example, buying 2-year U.S. Treasuries while selling 10-year U.S. Treasuries, and buying 5-year U.S. Treasuries while selling 30-year U.S. Treasuries.

Currently, the difference between the 5-year and 30-year U.S. Treasury yields is about 100 basis points, marking the steepest level since 2021, indicating that the market has already begun to price in the possibility of Powell being dismissed by the Trump administration, thus starting to bet on an increasingly steep U.S. Treasury yield curve According to reports, recently both Trump himself, as well as Russ Vought, the Director of the Office of Management and Budget (OMB), and the Federal Housing Finance Agency (FHFA) have accused Federal Reserve Chairman Jerome Powell of misleading the U.S. Congress regarding the $2.5 billion renovation project at the Federal Reserve headquarters. Some members of Congress have even sent letters to the U.S. Department of Justice, claiming that Chairman Powell committed perjury twice and are calling for criminal charges against him.

On Monday Eastern Time, media reported that U.S. Representative Anna Paulina Luna, a Republican from Florida labeled as a "MAGA faction" congresswoman and a political ally of Trump, sent a letter to the U.S. Department of Justice, stating that Chairman Powell committed perjury twice in Congress and is calling for criminal charges against him. The maximum penalty for perjury in the U.S. Congress is five years in prison and may also include fines.

In her letter, Luna wrote that on June 25, 2025, during testimony before the U.S. Senate Committee on Banking, Housing, and Urban Affairs, Chairman Powell made several substantial false statements regarding the renovation of the Federal Reserve headquarters. Luna specifically accused Powell of making false statements about the luxurious facilities and maintenance conditions of the Federal Reserve's Eccles Building.

Deutsche Bank emphasizes steepening trades—estimating the market impact implied by Powell's potential removal.

"In our view, the Trump administration's attempt to remove Powell aims to facilitate a more accommodative monetary policy, which would further raise inflation expectations and market risk premiums," they wrote. "While the implied market volatility is significant, it is not impossible to achieve."

Long-term U.S. Treasury yields may continue to rise

As President Trump and his allies jointly attack Chairman Powell, focusing on the excessive renovation of the Federal Reserve building, and hope for the Fed to cut rates faster than currently expected by officials, concerns about the independence of the Federal Reserve's monetary policy have significantly intensified in recent weeks.

On July 16, as financial media headlines flashed "Trump may officially remove Powell"—and after these news reports triggered severe market turbulence, Trump quickly denied the claims within an hour. During that hour, U.S. stocks, the dollar, and long-term Treasury prices fell sharply, while short-term U.S. Treasury bonds strengthened significantly due to expectations of short-term easing. This turmoil was also viewed by Wall Street investment firms as a stress test of the potential market impact of Trump harming the independence of the Federal Reserve.

Deutsche Bank strategists wrote that based on the dramatic fluctuations in the entire U.S. Treasury yield curve during that brief period last week, the nominal yield on 30-year U.S. Treasury bonds could soar by about 56 basis points, even though the front end of the yield curve may rally significantly due to short-term easing expectations.

Since July, the prices of 10-year and 30-year U.S. Treasuries have frequently experienced dramatic fluctuations, mainly due to investors weighing the outlook for U.S. inflation, consumer spending, and the Fed's rate-cutting path against the potential negative impact on the independence of the Fed's monetary policy. Last week's consumer inflation data, which showed the effects of tariffs being transmitted to prices, triggered a sell-off in the bond market, pushing the yield on 30-year U.S. Treasuries to its highest level since June, marking the first time it has surpassed 5% since June On Monday, it hovered around 4.95%.

It is worth noting that the 10-year U.S. Treasury yield premium, which measures investors' concerns about Washington's future massive borrowing scale, has now remained at its highest level since 2014.

The so-called yield premium refers to the extra yield that investors require for holding long-term bonds due to the associated risks. Some economists believe that during the Trump 2.0 era, national debt and budget deficits will be much higher than official forecasts, mainly because the new government led by Trump is centered on a framework of "significant domestic tax cuts + external tariffs" for economic growth and protectionism, combined with an increasingly large budget deficit, U.S. Treasury interest, and military defense spending. The U.S. Treasury's bond issuance may be forced to expand even more than the Biden administration's excessive spending during the "Trump 2.0 era." Additionally, under "de-globalization," China and Japan may significantly reduce their holdings of U.S. Treasuries, coupled with the risk of rising Japanese government bond yields spilling over. The "yield premium" for U.S. Treasuries with a maturity of 10 years or more is bound to be higher than previous data, and the 10-year U.S. Treasury yield, which serves as the "anchor for global asset pricing," is even brewing a wave of growth that could be wilder than the surge to over 5% in 2023