Yield curve steepens as Trump attempts to fire Fed’s Cook

NEW YORK – The US Treasury yield curve steepened on Tuesday as President Donald Trump’s attempt to fire Federal Reserve Governor Lisa Cook raised concerns about the US central bank’s independence and the prospect of a potentially more dovish composition of Fed policymakers.

Trump on Monday fired Cook over claims of mortgage borrowing impropriety. A lawyer for Cook on Tuesday said she will file a lawsuit to prevent the firing.

Shorter-dated yields fell more than longer-dated ones, causing the yield curve to steepen.

The expectations of a potentially more dovish Fed helped to send shorter-dated yields lower. But a politically influenced Fed that keeps interest rates lower than they otherwise might could increase concerns over rising inflation and reduce foreign demand for the debt on credibility fears. Those factors will weigh on longer-dated debt.

“It doesn’t necessarily mean that you’re going to have lower borrowing costs in the real economy,” said Zachary Griffiths, head of investment-grade and macro strategy at CreditSights in Charlotte, North Carolina. “We have several instances and examples of what could be extrapolated to be a longer-run trend of a steeper curve across Treasuries if Fed independence is in fact impacted.”

Trump has repeatedly criticized Fed Chair Jerome Powell for being too slow to cut rates, and he is expected to replace Powell with a more dovish appointment when his term as Fed chair ends in May.

Powell could, however, stay on as a Fed governor, which would limit the number of appointments Trump can make to the central bank.

The 2-year note yield, which typically moves in step with interest rate expectations, was last down 4.9 basis points on the day at 3.681%.

The yield on benchmark US 10-year notes fell 1.7 basis points to 4.258%.

The yield curve between two-year and 10-year notes was last at 58 basis points, and earlier reached 59.8 basis points, the steepest level since July 16.

Traders have been ramping up bets that the Fed will cut rates at its September 16-17 meeting, following more dovish commentary from Powell on Friday than was expected.

Any potential rate cut may depend on jobs and inflation data for August that is due before the September meeting.

Griffiths said the jobs market appears weaker than it was in September 2024, when the Fed cut rates by a larger-than-normal 50 basis points.

“When we think about the balance of risks and what we’ve learned about the labor market, I think the Fed can probably justify at least a couple of rate cuts from where we are today,” he said.

Traders are currently pricing in 85% odds of a September cut, according to the CME Group’s FedWatch Tool.

Data on Tuesday showed that new orders for key US-manufactured capital goods increased more than expected in July, suggesting business spending on equipment got off to a
strong start in the third quarter, but consumers’ deteriorating assessment of the labor market cast a pall over the economy.

Richmond Fed President Tom Barkin said his forecast is for a modest adjustment in interest rates given that he expects little variation in economic activity over the remainder of the year.

The Treasury Department saw strong demand for a USD 69 billion sale of two-year notes on Tuesday, the first sale of USD 183 billion in short- and intermediate-dated supply this week.

The notes sold at a high yield of 3.641%, around one and a half basis points below where they had traded before the auction. Demand was 2.69 times the amount of debt on offer, the best ratio since December.

The government will also auction USD 70 billion in five-year notes on Wednesday and USD 44 billion in seven-year notes on Thursday.

(Reporting by Karen Brettell; Editing by Andrea Ricci and Leslie Adler)