Speculation About Federal Reserve Leadership Is Triggering U.S. Treasury Yield Rises

The global bond market experienced a tense moment in early February 2025. Following the announcement of Christopher Waller’s nomination as Federal Reserve Chair by President Donald Trump, a wave of speculation began to dominate trader sentiment worldwide. This speculation is key to understanding why U.S. Treasury yields suddenly strengthened across various maturities, creating a complex market dynamic and prompting a reevaluation of U.S. monetary scenarios.

Waller’s Nomination Sparks Market Speculation

In early February, currency and bond markets faced a new discontinuity. The announcement that Waller would replace Powell at the helm of the U.S. monetary authority triggered massive speculation among professional investors. Data from Jin10 shows that this nomination prompted analysts to revise their future interest rate projections.

This dynamic started from the perception that Waller has a different policy stance from his predecessor. Although Waller has expressed criticism of the Federal Reserve’s balance sheet expansion, market interpretations of his political implications are more speculative than factual. According to Mohit Kumar, Chief Economist at Jefferies International, it is difficult to directly conclude that Waller’s hawkish orientation is the main reason Trump chose him for the position.

Interest Rate Cuts and Balance Sheet Adjustments Forecast

Rising demand for safe assets has driven capital inflows into Treasuries. This phenomenon coincides with a significant decline in precious metals markets, which traditionally compete with government bonds as hedging instruments. Market speculation is growing with estimates that the Federal Reserve may cut interest rates three times in 2025, a scenario that could dramatically alter fixed income asset valuations.

In addition to interest rate projections, markets are also considering the Federal Reserve’s balance sheet movements under Waller’s leadership. Discussions on trading desks have shifted from mere rate cut forecasts to debates about when the U.S. government will change its balance sheet posture. Speculation about a potential balance sheet reduction in the near term has created its own dynamics in the long-term yield curve.

Risks of Curve Steepening in a Fed Tapering Scenario

Guy Stear, Head of Market Strategy for Emerging Markets at Amundi, expressed a view reflecting the complexity of the situation. Markets are anticipating lower short-term interest rates alongside potential balance sheet adjustments by the Federal Reserve. The combination of these factors could deepen the yield curve—a scenario historically favorable for long-term bond investors.

However, latent risks emerge if long-term yields rise precisely when the curve is flattening. If this scenario materializes, the Federal Reserve may face external pressure to expand its balance sheet again—a policy paradox illustrating how market speculation can create dilemmas for monetary policymakers. This uncertainty underscores the intricate interplay between market expectations and actual actions by monetary institutions.