Update Bonds: Trump, commodities and market signals
In addition to geopolitical turbulence this week, one other story briefly dominated headlines. It was a failed attempt by US President Donald Trump to undermine the independence of the Federal Reserve.
The Trump administration launched a criminal probe into Fed Chair Jerome Powell, citing cost overruns on Fed renovation projects. In a video message to the US public, Powell called it a “pretext” for political interference in rate policy. The backlash was swift. Three former Fed chairs (Janet Yellen, Ben Bernanke and Alan Greenspan) warned that politicizing the Fed risks market instability and long-term economic damage. More importantly, this view was fully supported by Republican senators, promising to block new appointments to the Fed until this is resolved. Trump seems to be encountering increasing opposition from within his own party, as the November mid-term elections draw near.
Why does this matter? Central bank independence is a cornerstone of credible monetary policy. Undermining it erodes confidence and fuels volatility. Markets are already signalling concern. Long-term Treasury yields have risen, gold has hit record highs and the dollar weakened early in the week. Equities remain resilient, buoyed by strong earnings and optimism related to artificial intelligence. But the risk of higher funding costs for the US government looms large.
Beyond the US, Japan is heading toward snap elections. Political uncertainty has pushed Japanese government bond yields higher across the curve, with 20-year bonds up to 3.1% from 2.6% in November. In Europe, France withdrew its pension reform, removing the need for a confidence vote, while UK GDP surprised to the upside at +0.3%.
Commodities are also sending strong signals, as gold and silver surged. Shanghai metal prices jumped by 10% on tariff-driven cost pressures. Oil prices are volatile and rising, in step with increased geopolitical tensions in the Middle East.
The bottom line is that political risk will continue, but fundamentals remain supportive, as global macroeconomic data remain robust. Trump can be expected to do anything he can to stimulate the US economy before the US midterm elections, and economic growth in Europe and China is also expected to accelerate this year. For fixed income investors, investment-grade credit continues to offer a more attractive risk/reward profile than government bonds. The rise in term premiums and the recent steepening of the US Treasury and German Bund yield curves underscore this relative advantage, reinforcing the case for credits over sovereigns.