The independence of the Federal Reserve may be undermined by Trump, Citigroup advises investors to bet on long-term U.S. Treasuries and a decline in the dollar

According to the Zhitong Finance APP, Citigroup strategists have advised investors to increase bets on long-term U.S. Treasuries underperforming and the dollar declining, due to the possibility that U.S. President Trump may undermine the political independence of the Federal Reserve. Strategists Adam Pickett and Dirk Willer stated in a report on Wednesday that investors should add "a small position" to their existing trades at Citigroup, betting that the performance of 30-year Treasuries will lag behind that of 5-year Treasuries, as the yield spread between the two widens, causing the U.S. Treasury yield curve to steepen. They also suggested that investors go long on the euro against the dollar through derivatives.

It is reported that Citigroup strategists initiated this bet, known as the "curve steepening trade," in May, when they anticipated that Trump's tax cuts would lead to an expansion of government debt, thereby putting pressure on long-term Treasuries.

The "curve steepening trade" has become more popular in recent months. Since last week, when Federal Reserve Chairman Powell hinted that interest rate cuts may be needed to support the labor market, the U.S. Treasury yield curve has steepened. The logic is that the Federal Reserve may lower borrowing costs, benefiting short-term Treasuries, while inflation and fiscal risks could push up long-term Treasury yields.

Trump has further fueled the popularity of the "curve steepening trade," as the yield gap between 30-year and 5-year Treasuries widened to its highest level since 2001 on Wednesday. On Monday, Trump dismissed Federal Reserve Governor Cook on the grounds of alleged mortgage fraud, raising questions about the Fed's ability to effectively control inflation and intensifying concerns about the central bank's independence. The market speculates that Trump will appoint a policymaker more inclined to cut rates to replace Cook. While this may help lower short-term rates, it also poses risks of raising long-term inflation expectations.

Jonathan Cohn, head of U.S. interest rate strategy at Nomura Securities International, stated, "The curve steepening trade remains popular among investors for good reason." "Not only is there asymmetric downside risk to policy rates, but if the credibility of the Federal Reserve is questioned, the long end of the curve may also be impacted."

Additionally, Citigroup strategists expressed surprise that the dollar did not experience a more significant decline amid "restructuring risks" facing the Federal Reserve's decision-making body. They noted that the dollar's resilience may be due to renewed fiscal concerns in France, but they believe this development is "unlikely to materially weaken market demand for the euro."