Treasuries Fall as Trump Comments on Fed Erode Rate-Cut Outlook

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(Bloomberg) — Treasuries fell and traders trimmed their expectations for two US interest-rate cuts in 2026 after US President Donald Trump suggested he’d nominate someone other than National Economic Council director Kevin Hassett to succeed Federal Reserve Chair Jerome Powell.

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The slide in US government debt Friday pushed the two-year yield up as much as five basis points to 3.61%, the highest levels since the most recent Fed cut in December. Short-term interest-rate contracts priced in lower odds of two quarter-point rate cuts by the Fed this year after Trump’s comment on Hassett.

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Trump has said he’ll nominate someone willing to lower rates, and Hassett has been perceived as aligned with that agenda. Powell’s term ends in May. While Hassett has been the front-runner for the Fed Chair position in prediction markets, he fell behind former Fed Governor Kevin Warsh after Trump said he wanted to keep Hassett where he is.

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“Warsh has more credibility in the world of central banking,” whereas “Hassett is perceived as someone who will do more of Trump’s bidding,” John Brady, managing director at RJ O’Brien, said. “Right or wrong, it doesn’t matter. That’s just the market’s current perception.”

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Meanwhile, the Treasury market continues to be haunted by December employment data released a week ago, which prompted Wall Street banks with forecasts for a Fed rate cut at the next meeting on Jan. 28 to abandon them. Economists at JPMorgan Chase & Co. predicted no further rate cuts by the Fed, the Fed leadership transition notwithstanding.

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As a result, short-maturity yields have risen relative to long-maturity ones, shrinking their yield differentials and hurting what had become a popular wager in the Treasury market, anticipating the opposite. Smaller increases this week for longer-maturity yields narrowed the gap between two- and 10-year yields to about 60 basis points, down from an early-January peak above 70 basis points. The 30-year yield exceeds the five-year by about 102 basis points, down from 116 basis points.

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“The crowded trade has been the steepener and long the front end of the market, thinking that whoever the next Fed chair is is going to be dovish,” said John Fath, managing partner at BTG Pactual Asset Management US LLC. “That’s reversed the last few days.”

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Still, rate cuts remain plausible, Fath said, as there’s an argument that rates are still restrictive if inflation keeps moving toward the Fed’s target. Consumer prices data for December released this week showed a smaller-than-anticipated increase in the core gauge, which excludes food and energy.

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Two- and five-year yields also climbed more than five basis points on Thursday after weekly data on jobless claims suggested US employment conditions are strong enough to keep the Fed from cutting rates again in January. On Friday, the five-year’s yield rose to 3.81%, the highest since August.

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Also this week, the S&P 500 reached record highs, and Goldman Sachs Group Inc. raised $16 billion in a corporate bond offering, a record sum for a Wall Street bank.

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Friday’s smaller increases initially trailed steeper ones in most European bond markets, led by France’s, where a budget impasse threatened to worsen the nation’s deficit. Rebounding oil prices were also a factor.

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—With assistance from Carter Johnson.

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