Recommendation: Buy short-term Treasuries and sell long-term Treasuries Also recommend betting on the 'breakeven rate'—the yield spread between Treasuries and TIPS 80% in Market Pulse survey expect Powell to serve out his term Bond strategists on Wall Street are recommending a 'Powell hedge' strategy, which involves buying 2-year U.S. Treasuries and selling 10-year U.S. Treasuries, in anticipation of the possibility that President Donald Trump may dismiss Jerome Powell, Chair of the Federal Reserve Board. The logic is that a new Fed chair appointed by Trump is likely to pursue rate cuts, leading short-term rates to fall, but the ensuing rate cuts and loss of central bank independence could increase inflationary pressures, causing long-term Treasury yields to rise. According to Bloomberg on the 21st (local time), Citrini Research's bond strategist issued macro trading warnings to clients, making this recommendation in a memo. In fact, last week, precisely this scenario played out in the U.S. bond market: reports emerged that Powell's dismissal was under consideration, and about an hour before President Trump denied it, yields reacted accordingly. The yield on the U.S. 30-year Treasury surged by 11 basis points (0.11%), the spread with the 5-year Treasury widened to its largest since 2021, the dollar fell more than 1% against the euro, and the stock market plummeted. James Van Gellen, Citrini Research's bond strategist, said that the risk to the Fed is being taken so seriously on Wall Street that hedge investment strategies are needed to protect bond portfolios. Mark Dowding, CIO of BlueBay (the bond division of RBC Global Asset Management), stated, "The Fed chair has historically been free from political interference—now it's clear that's changing." Dowding, Allspring Investments, Invesco, and others are maintaining trades that hedge against the dollar's decline or exploit the steepening yield curve between short-term and long-term Treasuries as part of 'Powell Hedge' strategies. They argue that these trades are justified by not only expectations of U.S. economic slowdown but also ballooning fiscal deficits and government debt. The threat from the President toward Powell only reinforces the case for these strategies. President Trump and his aides have stepped up their scrutiny of Chair Powell, citing increased renovation costs at the Fed’s Washington headquarters. Powell has asserted that, if not for Trump’s trade war darkening the economic and inflation outlook, the Fed would likely have cut rates this year. However, most on Wall Street, including Van Gellen, see it as unlikely that President Trump could dismiss Powell on 'cause'; legally, the process would be very complicated. On prediction market Polymarket, investors place the probability of Powell resigning this year at 22%, up from 18% a week ago. In a recent Market Pulse survey, 81% of respondents expect Powell to remain as chair until his term ends in May next year. Noah Wise, senior portfolio manager at Allspring, said, "There is no benefit for the Trump administration in firing Powell now to hope for a rate cut." Megan Swiber, U.S. rates strategist at Bank of America, argues the yield curve steepener is a less effective hedge for Powell’s potential removal, since the U.S. Department of the Treasury could limit long-term bond issuance to curb rising long-term rates. Instead, Swiber recommends betting on the 'breakeven rate'—the spread between Treasuries and TIPS—claiming it’s a stronger hedge against the risk that post-Powell, the Fed might cut rates and stoke consumer prices. The 10-year breakeven rate, a gauge of investor inflation expectations, rose 0.03 percentage points to 2.42% last week, near its highest level since February. Swiber noted, "The inflation-linked bond market is currently pricing a premium for risks to Fed independence." She warned, "If the government continues to pressure the Fed while unemployment is at healthy levels and inflation is above target, the market will sense higher inflation risks and trade accordingly." Federal Reserve Board member Christopher Waller—seen as a contender for the next Fed chair—accelerated the race last weekend by stating he would oppose a rate cut at the July policy meeting. According to a recent Market Pulse survey, a third of respondents named Waller as the leading candidate to succeed Powell, closely followed by Treasury Secretary Scott Besant. Some investors pointed out that the 'Powell risk' is just one of a number of potential hazards. Ed Al-Hussainy, global rates strategist at Columbia Threadneedle, warned, "The worst-case scenario is the Fed loses its independence, tariff-driven inflation intensifies, and fiscal policy deteriorates ahead of midterms—all possibly happening at once." Al-Hussainy disclosed that he is betting on a rebound in rate volatility from a three-year low, using options. Guest reporter Jung-ah Kim kja@hankyung.com
July 21General
