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[MARKET ANALYSIS] USTs hit ahead of Trump's Fed Chair pick announcement, yields bid & the curve steeper

The anticipated nomination of Kevin Warsh for Fed Chair is generating a mixed reaction in the UST market, with yields rising and the curve steepening.

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[MARKET ANALYSIS] USTs hit ahead of Trump's Fed Chair pick announcement, yields bid & the curve steeper

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  • USTs on the backfoot as Kevin Warsh will reportedly be nominated by President Trump later today for the Fed Chair position. Reaction occurring as while Warsh has called for immediate rate cuts, his policy stance is net-hawkish vs the other options available to Trump. While Warsh will likely call for lower policy rates, given his recent commentary and the clear pressure from the administration, the main point of focus will be on the balance sheet, as Warsh has long been critical of QE and a large balance sheet
  • BofA believes it will be difficult for Warsh to get the FOMC generally to take his approach on the balance sheet. While for rates, further cuts are likely, but a departure from the data-dependent approach is not; Waller has been critical of this approach.
  • USTs at a 111-17+ low, a tick above Thursday's base, which itself is a tick above the WTD 111-15+ low. Amidst this, yields are firmer across the curve, which itself is steeper with action led by the long-end, as while Warsh is a hawkish pick vs the other options, he ultimately will still try to push rates lower in the near term, which may drive inflation and by extension rates higher on a longer horizon.
  • Trump/Warsh aside, we should also get the dissent texts from Waller and Miran today.
Context

Warsh’s hawkish stance relative to other candidates may lead to short-term rate cuts, but his critique of QE suggests longer-term implications for inflation and interest rates. Traders should be cautious of how this nomination could affect future Fed policy and sentiment in the fixed income markets.

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