What does the nomination of Miran mean for U.S. Treasuries? JP Morgan: The yield curve may further steepen
After Miran received the nomination for the Federal Reserve Board, the yield spread between the US 5-year and 30-year Treasury bonds widened. JP Morgan has brought forward its expectations for the next interest rate cut to September, noting that "Miran has always believed that the trade, immigration, and deregulation policies of the Trump administration have a dampening effect on inflation, a view that supports a more accommodative Federal Reserve policy."
JP Morgan believes that if Trump successfully appoints Economic Advisory Council Chairman Stephen Miran as a Federal Reserve Governor, the U.S. yield curve may further steepen from its steepest level in four years.
Following Trump's nomination of Miran as a Federal Reserve Governor on Thursday, the spread between U.S. 5-year and 30-year Treasury yields widened. Currently, the spread hovers above 100 basis points, more than double the level on Trump's inauguration day.
A report released on Thursday by JP Morgan analyst Jay Barry's team stated:
“Miran has consistently argued that the Trump administration's trade, immigration, and deregulation policies have a dampening effect on inflation, a view that supports a more accommodative Federal Reserve policy, thus supporting the steepening of the yield curve observed that afternoon.”
On Friday, the yield on U.S. 30-year Treasury bonds rose slightly, currently oscillating around 4.85%, while the 5-year yield remained stable around 3.81%.
In a paper published last March, Miran called for reforms to the Federal Reserve to achieve better economic outcomes. His stance may imply a potential adjustment to the current policy framework of the Federal Reserve, further increasing market uncertainty regarding the future direction of monetary policy.
The market has significantly increased bets on Federal Reserve rate cuts
After the weak non-farm payroll data was released last week, the money market has ramped up bets on Federal Reserve rate cuts. The swap market currently assigns a 95% probability to a 25 basis point rate cut by the Federal Reserve in September, and expects at least one more cut before the end of the year.
Danske Bank Chief Strategist Frederik Romedahl stated that while Miran's appointment “adds some uncertainty,” it will not be a decisive factor for the yield curve. He noted in a report that factors such as the fiscal deficit, bond issuance strategy, and recent Federal Reserve outlook will be more important.
Traders are set to focus on the U.S. CPI inflation data to be released next week. According to a Bloomberg survey of economists, the month-on-month increase in July CPI is expected to slow to 0.2% from 0.3% in June. This data may further influence market expectations regarding the Federal Reserve's policy path and significantly impact the shape of the yield curve.
JP Morgan analyst Michael Feroli adjusted his forecast after Miran's nomination, bringing forward the expectation for the next 25 basis point rate cut to September. He maintained the prediction of one rate cut at each of the subsequent three meetings, indicating that Wall Street institutions have begun to digest the potential impact of Federal Reserve personnel changes on monetary policy.
As Trump advances his personnel appointments for the Federal Reserve, the market will closely monitor how these changes may affect the monetary policy framework, inflation targets, and economic growth priorities. These changes could reshape the U.S. yield curve in the coming months, impacting asset pricing and investment decisions broadly
