The reshuffling of power at the Federal Reserve impacts U.S. Treasuries, Morgan Stanley warns: the yield curve may further steepen

According to the Zhitong Finance APP, JPMorgan Chase strategists stated that if U.S. President Donald Trump successfully appoints a key member to the Federal Reserve, the U.S. Treasury yield curve may steepen further from its widest level in four years. On Thursday, the difference between the yields of U.S. 5-year and 30-year Treasury bonds widened after Trump announced the nomination of Stephen Moore, chairman of the White House Council of Economic Advisers, to fill the vacancy left by the sudden resignation of Federal Reserve Governor Adriana Kugler. This appointment requires Senate approval. Additionally, reports suggest that Federal Reserve Governor Christopher Waller is expected to succeed Jerome Powell as Federal Reserve Chairman.

A report released later on Thursday by a JPMorgan Chase analyst team led by Jay Barry stated, "Moore has consistently believed that the trade, immigration, and deregulation policies of the Trump administration will suppress inflation. From this perspective, it supports the Federal Reserve adopting a more dovish policy, which also explains the steepening of the yield curve observed today."

On Friday, the yield on U.S. 30-year Treasury bonds stabilized at 4.82%.

The U.S. Treasury yield curve may steepen further.

The spread currently remains slightly above 100 basis points, more than double the level on Trump's inauguration day. Investors are demanding additional premiums to compensate for the uncertainty brought about by Trump's "liberation day" tariff announcement in April and the massive spending bill passed last month, which has led to increased fiscal spending.

A paper co-authored by Moore last March called for reforms to the Federal Reserve to achieve better outcomes.

Frederik Rømendal, chief strategist at Danske Bank, stated that although Moore's appointment "brings some uncertainty," it will not have a significant impact on the yield curve. He noted that factors such as deficits, bond issuance strategies, and the recent outlook for the Federal Reserve will be more important.

Due to poor employment data last week, the money market has increased its bets on a Federal Reserve rate cut. Currently, swap trading predicts a 95% chance that the Federal Reserve will cut rates by 25 basis points in September and expects at least one more rate cut before the end of the year. Traders are also paying attention to the U.S. inflation data to be released next week. Economists expect the inflation rate in July to drop from 0.3% in June to 0.2%.

After the news of Moore's nomination, JPMorgan Chase economist Michael Feroli brought forward his expectation for the Federal Reserve's next 25 basis point rate cut to September. He maintains that the Federal Reserve will cut rates three more times in the next three meetings