Market News

BY Sean Conlon@SeanAustin96 &  Sawdah Bhaimiya

The U.S. Treasury yield curve steepened with short-term yields falling and long-term yields rising after U.S. President Donald Trump moved to fire Federal Reserve Governor Lisa Cook from the central bank’s board.

The 2-year yield was nearly 2 basis points lower at 3.71%. The 10-year Treasury yield traded 2 basis points higher at 4.296% and the 30-year yield added 4 basis points to 4.9%. One basis point is equal to 0.01% and yields and prices move in opposite directions.

Investors bet on lower rates in the near future, but higher rates over the long-term after Trump chipped away at the Fed’s independence by announcing the removal of Cook from her position via a post on his platform, Truth Social.

The president cited allegations by Federal Housing Finance Agency Director Bill Pulte that Cook made false statements on one or more of her mortgage agreements.

Cook said in a statement Monday evening, “President Trump purported to fire me ‘for cause’ when no cause exists under the law, and he has no authority to do so.” Cook, who is the first Black woman to become a Fed Governor, said: “I will not resign” and that she will continue to serve in her role.

“You’re seeing that longer end of the curve telling you there’s some risk,” Kourtney Gibson, CEO of TIAA Retirement Solutions, said on CNBC’s “Squawk Box” Tuesday. “What it’s showing you is that they are putting a risk premium on the longer end of the curve at this point, and you’re seeing spreads widen. That is telling you that the adults in the room, aka the bond market, [are] actually saying, ‘We will determine what the rates are longer term.’”

“The Fed controls the short end of the curve, and we shall see what the Fed actually ultimately does and what the political uncertainty means for the marketplace, both in stocks as well as in bonds,” she continued.

“This could turn into the most market-relevant test so far of Trump’s ability to fire officials of independent government agencies,” Deutsche Bank analysts said in a note.

“Were Cook’s dismissal to hold, it would open up another seat for Trump to fill on the seven-person Federal Reserve Board. With Stephen Miran nominated for the seat recently vacated by Governor Kugler and with Governors Waller and Bowman dissenting in favor of a rate cut at the July meeting, this would increase the prospects of a dovish majority on the Board.”

And so investors bet perhaps the Fed would be less attentive to inflation in the future, making ownership of long-term bonds less favorable and sending those rates lower. The U.S. dollar declined vs. various currencies for a similar reason.

Several economic reports are due on Tuesday, including the latest durable goods orders and consumer confidence. The Case-Shiller Home Price Index and the Richmond Fed Manufacturing Index are also set to be released.

Investors will look to the personal consumption expenditures price index, the Fed’s preferred inflation gauge, later in the week for clues as to whether inflation is in a place where it would make sense for the central bank to lower rates, regardless of the political encroachment by Trump.