Wall Street Shaken by Powell Dismissal Rumors…‘Powell Hedge’ Strategy Spreads

Korea Economic Daily

Summary

Amid growing concerns over the Fed’s political independence, Wall Street is focusing on the 'Powell Hedge' strategy.
Analysts have suggested a strategy to buy 2-year U.S. Treasuries and sell 10-year Treasuries, while major investment firms are reportedly betting on a weaker dollar or widening yield spreads.
Some experts advise betting on an increase in the breakeven inflation rate.

Trump Criticizes the Fed… Preparing for Short-Term Rate Drops, Long-Term Rate Rises

Advice: "Buy 2-Year, Sell 10-Year Treasury Bonds"

Concerns are growing that the political independence of the Fed could be undermined, drawing attention on Wall Street to the so-called 'Powell Hedge (risk avoidance)' strategy.

According to Bloomberg News on the 20th (local time), on the 16th, James Van Gillen, an analyst at Citrini Research, sent investment advice to about 50,000 clients, suggesting: "Buy 2-year U.S. Treasury bonds and sell 10-year Treasuries." This came immediately after reports surfaced that Jerome Powell, Chairman of the Fed, could soon be dismissed, as President Donald Trump continued to intensify criticism against Powell.

Should a new chairman be appointed, there is a possibility that short-term interest rates will decrease as the chair complies with Trump's pressure for rate cuts. However, concerns over the loss of the Fed's independence and anticipation of more accommodative monetary policy could fuel expectations for inflation and push up long-term rates.

Major investment firms such as Allspring Global Investments and Invesco are betting on a weaker dollar, or profiting from a widening yield curve, in light of Powell’s possible dismissal, employing so-called 'curve steepener' strategies.

Megan Swiber, a U.S. rates strategist at Bank of America (BoA), recently advised betting on the rise of the 'breakeven inflation rate,' which is the difference in yield between ordinary government bonds and inflation-linked bonds.

Reporter: Da-yeon Lim allopen@hankyung.com