Rumors of Trump Firing Powell Lifts 30-Year Treasury Yields Above 5%; Wall Street Warns of Higher Levels

TradingKey - On Wednesday, July 16th, Eastern Time, long-term US Treasury yields soared following reports that President Trump was set to dismiss Federal Reserve Chairman Jerome Powell, only to retract somewhat after Trump denied the claims. The 30-year US Treasury yield remains above 5%.

The day prior, the 30-year Treasury yield breached 5% following the release of June's CPI data, which failed to allay market concerns over tariff impacts. This marked a return to the year's higher range for long-term rates, hitting levels not seen since early June. Wall Street cautions that if Trump indeed fires Powell or imposes higher tariffs, the 5% yield might not be the ceiling, but rather the floor.

Tariff Effects Emerge, Mild CPI Fails to Restore Market Confidence

Data released on Tuesday showed overall mild June inflation, yet a Bank of America report indicated a 0.2% rise in core goods prices, with a 0.3% increase excluding used cars, the strongest performance since February 2023. This highlights the cost pass-through to consumers due to tariffs. Market concerns are growing that tariffs could drive inflation higher in the second half of the year.

Amid these factors, long-term bond yields rebounded sharply. On Tuesday, the 10-year yield approached the 4.5% mark, with the 30-year yield touching 5%. Historically, a breach of the 5% mark signals serious challenges to long-term inflation and fiscal confidence, heightening market anxiety. Persistently high yields could lead to a shift towards safe-haven assets, while also raising mortgage and auto loan rates, dampening consumption and investment demand.

According to Bloomberg, traders have significantly increased bearish bets, wagering that 30-year yields will surge to around 5.3% within five weeks, with total premiums reaching approximately $10 million. Long-bond yields have not reached such highs since 2007, reflecting deep market concerns over the trajectory of long-term rates.

Dismissal Turmoil Resurfaces, Intensifying US Treasury Crisis

Analysts suggest that if Trump acts rashly on tariff policies or interferes with the Fed's independence, inflation expectations will rise, pushing the entire yield curve up. The curve would steepen further, as long-term rates are highly sensitive to inflation uncertainty.

Wolfe Research analysts Tobin Marcus and Chutong Zhu warn in their report that regardless of the circumstances, Trump's potential dismissal of Powell would be catastrophic for the market, causing significant negative impacts that could trigger a stock sell-off and a reactive spike in long-term yields.

Evercore founder Altman warns of the consequences of losing central bank independence, noting that countries with independent central banks, like the US, follow markedly different economic trajectories compared to those with government-controlled banks, such as Turkey and Argentina, which have experienced double-digit inflation rates in recent years. Thus, the prospect of the President dismissing the Fed Chair is an alarming notion.

Currently, the market generally believes Trump is unlikely to act, and the 5% yield threshold still provides some support, especially with short-term inflation expectations remaining relatively mild. However, the risk of escalating tensions between the White House and the Fed continues to rise, warranting investor attention.