Signs that US President Donald Trump would not select his chief economic advisor, Kevin Hassett, to be the next Federal Reserve Chair jolted the bond market from its months-long slumber.
For over four months, the benchmark 10-year US Treasury yield had largely hovered within a range around 4% to 4.2%. On Friday, however, the yield broke above the upper limit of this band. It is now on track to close above 4.2% for the first time since September 3rd of last year.
The yield surged significantly after Trump publicly told Hassett during an event at the White House that he wanted him to remain in his current position rather than move to the Federal Reserve.
This reaction in the bond market contradicts the arguments of some investors who believed that yields, and borrowing costs across the economy, would rise if Hassett were chosen to lead the Fed. These critics had persistently worried that Hassett would be more loyal to Trump than other candidates and would implement interest rate cuts exceeding what economic data could reasonably justify.
US Treasury yields largely reflect investors' expectations for the average level of interest rates set by the Fed over the bond's lifetime. Excessively aggressive rate cuts could heighten investor concerns about inflation and the risk of significantly higher future rates, which could, in turn, lead to an increase in long-term US Treasury yields.
Friday's rise in yields indicates that investors are instead making a more direct calculation: if the Fed cuts rates more in the short term, then even long-term yields should be lower; if it cuts less, long-term yields will be higher.
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