Why the bond market remains so calm amid Trump's Fed war
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The bond market served as a check on the Trump administration in April, when its sharp reaction forced a change in tariff policies. But bond investors seem asleep at the wheel after President Trump's firing of Fed governor Lisa Cook.
Why it matters: The muted reaction could be a sign that bond investors are pricing in an environment where Trump policies don't stick.
What they're saying: "Why is the long end so stable? The only possible reason I can come up with is that the Trump TACO thinking permeates bond markets," writes Krishna Memani, chief investment officer at Lafayette College.
- The idea of TACO, or "Trump always chickens out," allowed stock investors to ignore tariff risks.
- Memani thinks the bond market is borrowing the TACO framework.
Between the lines: Bond investors may believe the central bank will retain independence despite Trump's efforts —otherwise we would probably see a larger reaction in yields.
Zoom out: The 10-year Treasury yield is nearly unchanged since the November 2024 election.
- That's despite historically high tariffs, geopolitical uncertainty and declines in the dollar, as well as threats to the Fed's independence.
Yes, but: There is some evidence that corners of Wall Street are seeking to hedge their bets.
- Demand for "puts," or options to sell, on 30-year Treasury bonds picked up after Trump's attempted firing of Fed governor Lisa Cook.
- That means some investors are seeking downside protection, and see long bonds continuing to decline versus other government bonds.
- This is a trade that would potentially benefit from any further curve steepening that could occur if the central bank is threatened further.
What we're watching: The stock market has yet to face anything that has shaken its complacency. Will the same be true of the bond market?
Editor's note: This story has been corrected to reflect that puts are options to sell (not to buy).
