Deutsche Bank sees 30-year yield up by half point on Powell exit

The potential ouster of Federal Reserve chair Jerome Powell by US President Donald Trump would drive the 30-year Treasury yield higher by more than half a percentage point, according to Deutsche Bank strategists.

The clearest hedge against risks to the Fed’s independence, and a scenario in which US government spending consumes monetary policy, are yield curve steepener trades, a team including Matthew Raskin and Steven Zeng wrote in a note to clients. These trades benefit if the gap widens between short-term and long-term yields.

Currently, the gap between the five and 30-year yields is around 100 basis points, the steepest since 2021.

“Powell’s dismissal would be meant to produce easier monetary policy and should lift inflation expectations and risk premia,” they wrote. “The implied moves are big but plausible.”

Attacks on the Fed chair by the president and his allies in the administration, who wish to see the central bank lower interest rates faster than officials are currently projecting, have taken on fresh urgency in recent weeks.

On Jul 16, when headlines flashed across the wire that Trump was likely to fire Powell, a claim that Trump denied within an hour, US equities, the US dollar and long-term US government bonds retreated sharply while short-term Treasuries rallied.

Based on the gyrations in Treasuries across the curve seen during that brief time period last week, the 30-year nominal Treasury yield could surge some 56 basis points, the Deutsche Bank strategists wrote, even as the front-end of the Treasury curve rallies on expectations of easier monetary policy in the short-term.

The 30-year Treasury has tumbled in July as investors mull over US inflation, spending outlook and path for Fed interest-rate cuts. Last week’s consumer inflation figures sparked a sell-off in Treasuries that pushed the 30-year yield above 5 per cent for the first time since June. On Monday, it hovered around 4.95 per cent. BLOOMBERG