Surprise! President Donald Trump took his broadside against the Federal Reserve’s interest-rate increases to Twitter.
When his remarks to CNBC on central bank policy were released Thursday, bond traders largely took them in stride. But the latest attack on the Fed’s normalization — and, potentially, independence — caused a more drastic reaction. The U.S. yield curve from two to 10 years is steepening by the most since February. The 30-year Treasury yield broke through 3 percent after closing below that level for 17 consecutive sessions.
It seems as if bond traders might be overthinking things just a bit. In theory, yes, any slowdown in Fed rate hikes should increase inflation expectations compared with staying the course. That hurts long-term Treasuries. Additionally, given the flattening trend over the past several months, it makes sense for shorter-dated U.S. debt to be considered relatively cheap, especially if central bankers pause on raising rates and pension demand dries up in the coming months. Sell the long end, buy the short end and give up just 25 basis points in yield? Not a bad trade.
That’s the cerebral way of looking at things. On the other hand, it’s a summer Friday and the benchmark 10-year Treasury yield is in the midst of its smallest monthly trading range since 1973. A Trump tweet bomb gains a little extra attention in a market like that. Plus, reports out of Japan suggest its central bank may allow the yield curve to steepen there. And that’s to say nothing about bond traders’ profit motives: Correctly timing a U.S. yield-curve steepening could make their entire year.
It just doesn’t make much sense to place a big bet that these tweets will change the prevailing trend. Fed officials, conveniently, are about to go into their self-imposed blackout period before their Aug. 1 rate decision. But St. Louis Fed President James Bullard got in a few parting words Friday, telling reporters after a speech in Kentucky that the recent comments won’t affect the central bank and that he’s not surprised Trump has an opinion on monetary policy. After all, as my colleague Jonathan Bernstein wrote, presidents always look for ways to goose the economy when in the Oval Office. And Fed Chairman Jerome Powell serves as an easy target if things go south.
Ironically, Friday’s bout of curve steepening probably gives the Fed more room to raise rates. As I wrote earlier this week, Powell appears content to keep tightening and hope that longer-term yields will eventually increase as well. While it’s anyone’s guess as to whether Friday’s sell-off will persist, the yield curve offers quite a bit more breathing room for central bankers than it did just hours ago.
Of course, those same officials now have less breathing room politically. But for now, bond traders have no reason to expect they’ll change course because of that. If anything, some suggest Trump’s goading may encourage them to stick to their plan to prove that they’re independent. Any swift market moves as a reaction to the president’s interest-rate views should be discounted accordingly.