by Ye Xie
On Wednesday morning, as markets worldwide shuddered on news that President Donald Trump was likely to fire Jerome Powell, James van Geelen at Citrini Research wasted no time in blasting a “macro trade” alert to his some 50,000 clients.
In it was a simple recommendation: buy two-year Treasuries and sell US 10-year notes.
The theory is that a new Fed chair would be more likely to fall in line with Trump’s lobbying for lower interest rates, and that would push down short-term yields. Easier monetary policy, coupled with the perceived loss of the central bank’s independence, could in turn stoke inflation concerns, driving yields on long-term debt higher.
This is exactly what happened, and more, in the minutes after the Powell headlines.
Call it the Powell hedge.
Like many on Wall Street and beyond, van Geelen is taking the once-unthinkable threat seriously — and that means protecting against it. That’s why even after Wednesday’s knee-jerk moves reversed a bit when Trump downplayed any imminent plan to force out Powell, van Geelen stuck to his recommendation. Others are doing the same.
“We would have always assumed there is no basis for firing a Fed chair and the Fed has been immune from political interference,” said Mark Dowding, chief investment officer of the BlueBay Fixed Income unit at RBC Global Asset Management. “There is a clear sense that this is now changing.”
For many investors, including Dowding and some of his counterparts at firms such as Allspring Global Investments and Invesco Ltd., the perfect Powell hedge conforms with positions they’ve held for a while now, from bearish dollar bets to the so-called steepener trade, which benefits from a widening gap between short-and long-term yields.
Trump’s almost daily attacks on Powell are spilling over into markets.
These wagers, they say, are backed by sound economic and fiscal reasoning, from expectations of slowing US growth to the reality of swelling debt and deficits. The threats to Powell are just another tailwind.
Attacks against the Fed chair have stepped up lately, with Trump and his allies seizing on the increased renovation costs of the central bank headquarters in Washington to intensify the scrutiny on Powell in recent weeks. For his part, Powell maintains the Fed would have lowered interest rates this year, if Trump’s tariff war hadn’t clouded the economic and inflation outlook.
Most on Wall Street, including van Geelen, don’t expect that Trump could fire Powell for “cause” without messy legal challenges. Traders at the betting market Polymarket see the probability of Powell leaving in 2025 at 22%, up from 18% the week earlier. A majority of respondents to the latest Markets Pulse survey expect the chair to stay at the helm until his term expires in May.
“There’s limited benefit of firing Powell now,” said Noah Wise, a senior portfolio manager at Allspring.
Investors got a glimpse at what might happen in such a scenario on Wednesday. During the less-than hour window between the news headline that Trump may remove Powell and the president’s denial, US 30-year yields jumped 0.11 percentage point and its gap with five-year notes widened to the highest since 2021. The dollar fell more than 1% against the euro and the stock market tumbled.
For Meghan Swiber, a US rates strategist at Bank of America, the curve steepener trade is a less effective hedge against a Powell ouster because the Treasury may limit issuance of long-term debt as a means of capping longer-term yields. The next quarterly refunding announcement is set for July 30.
Swiber instead recommends betting on a higher breakeven rate — the yield difference between Treasuries and inflation-linked bonds. This is a “cleaner” hedge against the potential risks of a dovish Fed pushing up consumer prices, she said.
Already, the 10-year breakeven rate – which reflects investors’ inflation expectations — increased 0.03 percentage point last week to 2.42%, near the highest level since February.
“We’re seeing an inflation market pricing a premium around the Fed independence risk,” said Swiber. “Ultimately if you’re putting pressure on the Fed in an environment where unemployment is low and we’re still seeing inflation a far cry from the Fed’s target, you ultimately have the market trading and perceiving more persistent upside risk to the inflation landscape.”
Fed Governor Christopher Waller, one of the candidates considered in the running to be the next Fed chair, hinted on Friday that he would dissent if his colleagues vote to hold interest rates steady at their policy meeting in late July, making his case for a rate cut to support the labor market. A third of respondents to the latest Markets Pulse survey said Waller was their top pick as a replacement to Powell, closely followed by Treasury Secretary Scott Bessent.
Some investors see the Powell risk as only one of a confluence of potential hazards.
“The nightmare scenario is the Fed loses its independence, tariff inflation is big and the fiscal policy turns out to be more simulative ahead of mid-term election, and it’s all happening at the same time,” said Ed Al-Hussainy, global rates strategist at Columbia Threadneedle.
Al-Hussainy said he’s using options to bet that interest-rate volatility will rise from near a three-year low.
What Bloomberg strategists say ...
“If the FOMC actually follows Waller’s advice, a backdrop of rising market-based measures of inflation expectations means higher long-term yields are more likely. After the Fed’s first rate cut last year, long-term rates only stopped rising when the Fed stopped cutting the fed funds rate. If the Fed stands pat on rates with one or two dissents, the uncertainty stemming from such a scenario could add to the term premium and raise long-term rates anyway. Ironically, those outcomes would put the Fed under even more pressure from Trump to cut borrowing costs.”
-Edward Harrison, macro strategist. Click here for the full analysis.
As for Citrini Research’s van Geelen, his latest call isn’t a brand new idea. Back in March 2024, he told clients to put on the curve-steepener trade, anticipating Trump would win the election. He saw the possibility that Trump would fire Powell and install a Fed chair who is likely to cut rates. “It sounds outlandish, but it’s entirely possible,” he wrote in a note at the time.
After van Geelen made money on the trade for a couple months, he exited it, as it’s costly to maintain. Now, it’s looking worth it again.
“You have to basically pick your times where you think that it’s going to accelerate,” van Geelen said. “This seems like one of those times.”
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