Hassett is "out," but why did U.S. Treasury bonds "fall instead of rise"?

Trump showed hesitation about nominating Hassett as the Chair of the Federal Reserve, breaking the recent calm in the US Treasury market. According to Wallstreetcn, on Friday, January 16th local time, Trump stated that if Kevin Hassett were to leave his position as Director of the White House National Economic Council, the administration would lose one of its most influential "spokespersons" on economic issues. At a White House event, Trump looked at Hassett and said: "You've done too well. If you want to know the truth, I actually want you to stay in your current position." Shortly after Trump made these remarks, users on prediction website Polymarket swiftly bet that Hassett would not receive the nomination for Fed Chair. Bettors now believe former Fed Governor Walsh has nearly a 60% chance of becoming the Fed Chair. (Hassett's probability of being nominated for Fed Chair fell to 17%, Waller's probability also slightly rose.) Hassett had previously been seen as the main candidate to succeed current Fed Chair Powell, regarded as Trump’s most loyal contender and considered most likely to push for interest rate cuts. His “removal” signals that a more hawkish candidate may take the role. US Treasury markets reacted sharply. The benchmark 10-year Treasury yield surged to 4.23%, the highest since September 2nd of last year. The 2-year yield rose to its highest point since December 9th. (Major US Treasury yields rose rapidly on Friday.) ## Interest Rate Path Faces Reassessment The market sold off U.S. Treasuries, largely because investors are re-evaluating the potential interest rate direction under different candidates. **Although Trump has repeatedly stated his desire for the Fed to cut rates, Walsh's policy stance is more unpredictable than Hassett’s.** Ian Lyngen, Head of Rate Strategy at BMO Capital Markets, noted in a report that among Trump’s possible nominees, Hassett is widely viewed as the most loyal, which makes him the most likely to push for rate cuts, even if the data does not support such moves. In comparison, Walsh is a "bigger variable." During his tenure at the Fed, Walsh was a hawk concerned about inflation, and even called for rate hikes during the financial crisis. According to Wallstreetcn, even though Walsh began advocating for rate reductions late last year, he remains hawkish on balance sheet issues. Wells Fargo’s strategist team wrote in a report earlier this year: "Given Walsh's past hawkish stance and recent dovish remarks, his policy orientation is somewhat elusive." Evercore’s Krishna Guha summarized: "We believe that from the short term to the end of 2026, based on an optimistic outlook for the supply side, Walsh’s stance will likely be dovish, much like Hassett. The difference is, if the economy overheats in 2027/2028, he is more likely to revert to his previous hawkish stance." ## Calm Markets Suddenly Roiled Friday’s surge came after bond prices remained almost flat for weeks. Earlier this month, despite the US forcibly controlling the Venezuelan leader and ongoing potential conflicts with Iran and Denmark, Bond prices continued to trade within a narrow range. As of Thursday, the trading range for the 10-year Treasury yield so far this year was only 8 basis points. (10-year US Treasury yield movement so far this year) The recent lull in the US Treasury market has also been affected by a sharp drop in the ICE BofA MOVE index. This index, the "panic index" for expected US Treasury volatility, fell to 56.14 on Thursday, marking its lowest close since September 2021. **The days of a sluggish market may be over.** **Analysts believe it remains unclear when Trump will make a decision on the Fed, but it is very likely to happen in the coming weeks.** **The US Supreme Court is also expected to rule on the Trump administration's International Emergency Economic Powers Act (IEEPA) tariffs this year, which could trigger another wave of selloffs.** Risk Warning and Disclaimer Market risk exists; invest with caution. This article does not constitute personal investment advice and has not taken into account individual users' specific investment objectives, financial circumstances, or needs. Users should consider whether any opinions, views, or conclusions in this article are suitable for their particular situation. Investment is at your own risk.