Long U.S. Bonds Are Paying the Price on Firing Cook, Fueling the Biggest Curve Steepening in 3 Years

TradingKey - News that President Donald Trump is pushing to remove Federal Reserve Governor Lisa Cook has elevated concerns over Fed independence to a new high. Wall Street analysts are warning that a repeat of the “equities, bonds, and currency triple sell-off” seen in past political episodes could be on the horizon, with investors now targeting U.S. long-term bonds as the primary victim — driving a sharp steepening of the yield curve.

Analysts note that with two of the seven current Fed governors already appointed by Trump, and the recent nomination of Stephen Miran to fill the vacancy left by Adriana Kugler, a successful push to remove Cook would give Trump a majority of Fed governors aligned with his agenda.

This potential shift in the Fed’s leadership structure is deeply concerning, as it raises fears that the Trump administration could use the central bank to push for aggressive rate cuts, fueling expectations of higher inflation and elevated long-term interest rates.

On Tuesday, the U.S. dollar weakened, 2-year Treasury yields fell, but 30-year yields rose, peaking at 4.94%, widening the spread between short- and long-term yields to over 120 basis points — approaching the highest level in nearly three years, last seen during market turmoil following Trump’s April “Liberation Day” announcement of reciprocal tariffs.

ING economists warned that if Trump succeeds in removing Cook, it will have a significant impact on the Fed’s independence, with the cost being higher inflation and higher interest rates.

S&P Global Ratings, when affirming the U.S. sovereign credit rating at AA+, stated that political developments undermining the strength of U.S. institutions, the effectiveness of long-term policymaking, or Fed independence, would place the rating under pressure.

Commonwealth Bank of Australia strategists said Trump’s move further undermines the independence of the FOMC, a key pillar supporting the dollar’s safe-haven status, which could in turn trigger further dollar selling.

While analysts warn of a potential triple sell-off in stocks, bonds, and the dollar, the impact on other assets appears more muted compared to long-term Treasuries:

• On August 26, S&P 500 futures were down just 0.05% in pre-market trading
• The DXY dollar index declined 0.18% on the day