By Joy Wiltermuth
Bond investors taking a ‘wait-and-see’ approach on Trump’s attempt to fire Fed governor Lisa Cook
Global bond yields have climbed amid a jittery market for bond investors.
President Donald Trump’s quest to get U.S. interest rates lower may be playing out in Washington, but it likely ultimately boils down to the global bond market.
Trump wants greater control over the Federal Reserve’s interest-rate decisions, yet those efforts can go only so far. While the Fed holds the key to short-term rates, market forces dictate longer-term borrowing costs through the bond market.
The U.S. and other major economies have been watching their longer-term borrowing costs shoot higher. That means investors can get some of the highest yields in several decades – but they also face the headache of lending to major economies as governments pile on ever more debt.
“It really is the same theme playing out across the G-7,” said Torsten Slok, chief economist at Apollo Global Management (APO), referring to the Group of Seven major economies comprising Canada, France, Germany, Italy, Japan, the U.S. and the U.K. “The fiscal situation is serious in essentially all countries, with some nuances.”
Many global central banks, including the Federal Reserve last year, lowered short-term rates from peak postpandemic levels. Yet the below chart shows benchmark 10-year bond yields around the world remain stubbornly high.
Part of move higher stems from global central banks looking to reach more “normal” rate regimes relative to history. In Europe, spending also has been picking up, while there have been recent commitments to increase defense spending. That risks growing deficits, more government bond issuance and a higher “term premium.”
Term premium refers to the extra compensation investors demand on bonds that mature over a longer-time horizon, often 10 to 30 years. Those rates matter because the budgets of households, businesses and governments tend to hinge on long-term financing costs.
What happens with long-end rates also can hinge on inflation worries. A look at Japan’s government bonds underscores this trend, with its 30-year bond yield BX:TMBMKJP-30Y at 3.21% – near the highs in almost 30 years of recordkeeping – while it’s 2-year rate BX:TMBMKJP-02Y was only 0.85% on Thursday.
Japan has been battling inflation for the first time since the 1990s, but its central bank has been “slow and cautious” in normalizing its policy rates, said Paul Mielczarski, head of global macro strategy at Brandywine Global.
With the Bank of Japan refusing to increase rates more quickly, Mielczarski said that’s been putting upward pressure on the long end of the Japanese yield curve.
“If inflation is higher, investors need higher compensation to make sure their investments are not being undermined,” Slok at Apollo said. “If the Fed does cut interest rates for more political reasons, then you will, of course, have fears of it allowing inflation to be higher.”
The Fed’s independence from political pressure has long been viewed as a key pillar of the $29 trillion Treasury market and the strength of the U.S. dollar DXY.
Steepening yield curves
Trump’s move to fire Fed governor Lisa Cook this week has provoked little obvious reaction in the bond market.
That doesn’t mean investors aren’t bothered by attacks on the Fed’s independence. Economist Paul Krugman argued in a new Substack post that investors may not be “freaking out” because “market pricing almost never takes into account the possibility of huge, disruptive events, even when the strong possibility of such events should be obvious.” Krugman pointed to robust risk appetite ahead of the U.S. subprime-mortgage meltdown nearly two decades ago, as well as before the eurozone debt crisis blew up after 2009.
It also helps to look at the big picture. The 10-year U.S. Treasury yield BX:TMUBMUSD10Y has been pretty steady at around 4.21% as of Thursday. That’s more than in France, where public finances have taken center stage amid the nation’s looming political crisis; French 10-year debt BX:TMBMKFR-10Y was yielding 3.48%, according to FactSet.
Then there’s the U.K., “the poster child” for rising term premium in response to budget deficits, said Brian Quigley, a senior portfolio manager at Vanguard. Its 10-year bonds BX:TMBMKGB-10Y were yielding almost 4.70%.
That means expected returns on longer-duration bonds look better today than in quite some time in the U.S. and globally, Quigley noted. Higher costs also can be a way for markets to enforce some fiscal disciple on governments, he added.
“Investors are clearly concerned about the potential for a loss of Fed independence, which would drive the yield curve steeper and the dollar weaker,” Brandywine’s Mielczarski said.
The 2-year Treasury yield BX:TMUBMUSD02Y has been falling in anticipation of rate cuts in September, while the 10-year rate was little changed this week – causing the spread to widen between the two plots by about 60 basis points, up from nearly zero in December.
“This reset to higher yields is a big thing for fixed-income investors,” said Chip Hughey, managing director of fixed income at Truist Advisory Services. Yields could become more scarce if the U.S. economy wobbles, prompting the Fed to act more forcefully.
Hughey said demand for fixed income picked up around July’s ugly jobs report. The hope is the Fed can execute some “insurance cuts” that provide some relief ahead of a potentially weaker labor market, he added.
On the flip side, to achieve higher income from today’s elevated bond yields, investors also need to navigate heavy government debt issuance around the world, as well as higher levels of uncertainty and volatility, Hughey said.
That includes Trump’s push to fire Cook. “Obviously, it’s a big unknown,” he said, adding that it isn’t at all clear if the firing is legally possible. “There is a bit of a wait-and-see around that.”
Read: The 6 things to watch as Trump blitzes the Federal Reserve
-Joy Wiltermuth
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08-28-25 2237ET
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