MAGA Fed Put
Doug Nolan
France’s 10-year “OATS” yields jumped nine bps this week to 3.51%.
Thirty-year French yields surged 12 bps to 4.42%, trading within four bps of the spike high during European bond crisis month, November 2011.
The France five-year/30-year yield spread widened seven to 160 bps, the largest term premium since June 2019.
France’s 10-year yield spread versus Germany widened a notable nine bps this week to 79 bps, trading to the widest level since January.
Alarmingly, French 30-year yields now exceed those of Greece.
France’s CAC40 Equities Index dropped 3.3% this week, with the CAC Mid & Small index sinking 4.7%.
French banks were under notable pressure, with Societe Generale sinking 8.9% and BNP Paribas down 7.9%.
August 26 – Financial Times (Emily Herbert, Ian Smith and Adrienne Klasa):
“French borrowing costs rose to their highest since March and stocks sold off for a second day on Tuesday, as investors reacted to the prospect of a government collapse as soon as next month.
Prime Minister François Bayrou… called a confidence vote for September 8 over his deficit-cutting budget proposals.
Lawmakers have two weeks to ‘say whether they are on the side of chaos or on the side of responsibility’, Bayrou said as he addressed union members…
‘The first risk, the one from which we would not recover, is denial.’ Finance minister Éric Lombard said… the government ‘certainly was not resigned’ to losing the confidence vote.
But he warned that there was a risk the IMF could step in if the government were to fall next month and subsequent administrations fail to tackle the country’s finances.”
August 27 – Bloomberg (William Horobin and Tom Fevrier):
“Francois Bayrou is clinging to a slim chance of remaining France’s prime minister as parliamentary math leaves only a narrow path to survival in his self-inflicted confidence vote.
To avoid being forced to resign on Sept. 8, the premier must convince either the far right or an improbable series of leftist lawmakers to abstain, going back on their pledges to vote against him, a Bloomberg News analysis of different scenarios shows.
‘He sought to shock the French public and political system into facing the gravity of the country’s debt crisis but he may have changed little but the date of his own execution,’ Eurasia Group’s Mujtaba Rahman said in an Aug. 26 research note about Bayrou’s chances.
He put the probability of Bayrou’s ouster at 70%.
The likely downfall would plunge France back into acute political uncertainty and heighten doubts over whether any government will be able to rein in the largest budget deficit in the euro area.”
Political crisis in France.
Markets have been there, done that.
And with all the mayhem in Washington, it would take some convincing to get American investors to take notice.
But I suspect there remains large levered speculative positioning in French bonds – and European debt more generally.
European banks traditionally sit with hefty holdings of the continent’s government bonds, especially the higher yielding “peripheral” version.
Deleveraging risk is materializing across the pond.
Italian 10-year yields rose five bps this week to 3.58%, less than a basis point from a three-month high.
Greek yields gained five bps to 3.41% - only four bps below highs back to mid-April, while Portuguese yields rose five to 3.17% (2bps from high since April).
Keep in mind that the ECB has slashed rates over 200 bps over the past year to 2.15%. European yields have marched higher.
European long bonds have been under notable pressure.
Italian 30-year yields surged 10 bps this week to 4.59%, the high since April 9th - and only 11 bps from two-year highs.
Greek yields rose nine bps to 4.36%, the high since March (3bps from 2-yr highs).
Europe’s STOXX 600 Banks Index was slammed 4.5% this week.
Italian banks were hit 4.1%.
European (subordinated) Bank CDS jumped nine this week to 101 bps – the largest increase since “liberation day” week (up 28 bps).
Italy’s MIB Equities index fell 2.6%, while Greek stocks (Athens Stock Exchange) dropped 3.9%.
Not to be forgotten, UK 30-year yields rose five bps this week to 5.60%.
This was only a basis point below the August 18th close, which was the high back to 1998.
The five-year vs. 30-year spread widened to 150 bps, the steepest term premium since February 2017.
August 26 – Axios (Neil Irwin):
“The president and the Fed have been on a collision course for months.
At 8:02pm ET Monday night, the crash took place, as President Trump said he was firing Federal Reserve governor Lisa Cook for alleged false claims in her mortgage applications four years ago.
Cook says she will fight what she and her lawyers characterize as an illegal attempt to fire her, setting up a legal battle royale over who is really in charge of the world's most important central bank…
If the president can fire Cook for the allegations involving some old mortgage applications that she has thus far had no legal recourse to address, he can fire pretty much anyone.
It could, wrote Evercore ISI's Krishna Guha and Marco Casiraghi, establish a precedent that the president ‘has substantial discretion to determine what meets the ‘for cause’ standard for removal in the future.’”
The Dollar Index was little changed this week, while 10-year Treasury yields declined three bps.
U.S. markets were remarkably calm in the face of an unprecedented threat to Fed independence.
The dollar and short-term Treasuries likely benefited somewhat from France’s political crisis.
Thirty-year Treasury yields rose five bps this week to 4.93%, trading only 18 bps points from the high back to July 2007.
The five-year/30-year spread widened five this week to 123 bps – the largest term premium since June 16, 2021.
Market inflation expectations continue to grind higher.
The five-year “breakeven rate” (Treasuries vs. TIPS) ended Wednesday at 2.55% (closed week at 2.52%), the high since April 3rd.
August 26 – Bloomberg (Saleha Mohsin):
“The Trump administration is reviewing options for exerting more influence over the Federal Reserve’s 12 regional banks that would potentially extend its reach beyond personnel appointments in Washington, according to people familiar…
President Donald Trump’s move… to oust Fed Governor Lisa Cook, if it holds up in court, would give him an opportunity to secure a majority on the seven-person Board of Governors.
But the central bank’s Federal Open Market Committee, which is responsible for setting interest rates, also includes five regional bank presidents who — unlike the governors — aren’t nominated by the White House or confirmed by the Senate.
Scrutiny from the administration of the process for selecting and reappointing reserve bank presidents — responsibility for which is shared between the private-sector boards of those banks and the Board of Governors — would mark another extraordinary step in Trump’s ongoing campaign to influence monetary policy, which has traditionally been provided some insulation from political pressure.”
August 26 – Bloomberg (Jarrell Dillard and Annmarie Hordern):
“Former Federal Reserve Vice Chair Lael Brainard suggested there’s a real risk of multiple Fed district bank presidents getting removed from office next year as a result of politically charged maneuvering by President Donald Trump…
Successfully taking out Cook would give Trump the chance of gaining a majority of his picks on the seven-member Board of Governors.
The board is scheduled in February 2026 to vote on renewed terms for the 12 district bank chiefs — five of whom each year vote on interest rates.
‘The president essentially is moving to shift the majority of the Board of Governors well before what was contemplated in terms of the institutional structure and their terms,’ Brainard said…
‘And that opens the door, when renewals of all of the Reserve Bank presidents come up in February,’ to potentially not renew some of them, she said.”
President Trump (August 26th, 2025):
“We’ll have a majority very shortly.
So that’ll be great.
Once we have a majority, housing is going to swing, and it’s going to be great.
People are paying too high an interest rate.
That’s the only problem with us.
We have to get the rates down a little bit.”
Long past pulling punches.
And I’ve seen enough thesis confirmation to refuse to pull back.
To be clear, this is not about “politics.”
For me, it boils down to right and wrong and principle.
August 27 – Wall Street Journal (Greg Ip):
“The market response to President Trump’s Monday attempt to fire a Federal Reserve governor was relatively subdued.
Don’t let that fool you.
If Trump’s effort to remove Lisa Cook for cause succeeds, and perhaps even if it doesn’t, this week will go down as one of the most consequential for financial markets in decades.
It could mark the end of the Federal Reserve’s independence from White House control, which it effectively obtained in 1951.
As a result, inflation is likely to be higher and more volatile than in the decades before 2020.
Investors aren’t yet pricing in such a scenario.”
A lot of outrageous and dangerous behavior is being normalized.
To hear a U.S. President – especially President Trump – boasting about soon having majority control of the Federal Reserve Board should send shockwaves across markets, the country, and the world.
The S&P500 closed Thursday at an all-time high.
I’ve read various analyses of why markets didn’t respond to President Trump’s firing of Governor Lisa Cook.
Likely going to the Supreme Court, this saga will unfold over months.
With inflation expectations well-anchored, there is minimal Treasury market risk.
The Fed is poised to begin cutting rates in September, so the President’s antics are not too consequential.
Nothing I’ve heard or read gets to the heart of the issue.
Bill Dudley, former President of the New York Fed, posted an interesting column Wednesday for Bloomberg:
“Earlier this month, I wrote a column downplaying the threat that President Donald Trump poses to the Federal Reserve’s independence.
Now I’m much more worried.
I think markets should be, too.”
Dudley’s focus was in the same vein as Lael Brainard’s (and others): with Trump having appointed four of the seven members of the Board of Governors, the typical routine Fed President five-year reappointments could now become a source of major risk to Fed independence.
“In theory, this could be a way to populate the FOMC with members that would do Trump’s bidding, empowering the president to get the big rate cuts he seeks.”
Little wonder speculative markets just don’t see much of a problem here.
I’ll break the news: the loss of Fed independence is not at its core a rates issue.
Moreover, while higher inflation is a risk, it is not the primary risk.
A month ago, Bill Dudley - and about everyone else - saw the President as an Fed independence annoyance, whose threats on Powell’s job would not go far.
President Trump wouldn’t risk the market convulsions that would erupt if Powell was forced out months before the end of his term.
This week, the administration’s intentions were more clearly revealed.
In previous analysis, I’ve espoused analysis that the Trump folks have a well-designed plan.
They are essentially following Viktor Orbán’s autocratic (breakneck) assault on democratic institutions and the legal system, the dismantling of checks and balances, stifling the media, a major crackdown on immigration, attacks on academia and rivals, electoral system manipulation…
Not only is the Federal Reserve not off limits, it’s fundamental to implementing the administration’s radical right-wing agenda.
What has been achieved in seven months is nothing short of shocking.
Things would be different today had April’s fledgling de-risking/deleveraging turned serious.
Market dislocation (aka “crash”) would have immediately stymied - if not jeopardized - the radical MAGA makeover.
A deep recession would undoubtedly trigger a major backlash.
Fourteen months – November 3, 2026.
I doubt top administration officials and advisors envisage too far out into the future.
Sure, the ballooning debt load is unsustainable.
Of course, leaning on T-bill issuance to finance massive deficit spending is policy negligence.
The confluence of massive deficits, tariffs and lower interest rates surely raises intermediate-term inflation risks.
But what matters is maintaining Republican dominance through 2028, ensuring four years of historic restructuring that will be close to irreversible.
For 14 months, pull out all the stops – no stone unturned – all hands on deck - exhaust each and every option.
And control over monetary policy is mission critical.
“The great financial crisis” illuminated Bubble peril.
Fundamental to Bubble Analysis is that of the various inflationary manifestations, asset inflation and Bubbles are much more pernicious than consumer price inflation.
Various constituencies will demand policy responses to counter surging goods and services prices.
There is essentially no pushback against higher asset prices and speculative Bubbles.
We’re at such a precarious Bubble juncture, an incredible extended “terminal phase” that ensures acute market, financial, economic, social, political, and geopolitical risks.
Decades of central bank mismanagement stoked ever greater Bubbles, reflationary policy responses, and structural maladjustment.
And the more egregious the market interventions, manipulation, and bailouts, the more outrageous the scope of speculative leverage and manic financial excess.
Responding with ever larger market liquidity backstops, the Fed and global central bank community became the essential lifeline for highly levered global speculative Bubbles.
Sure, the President prefers lower rates.
But the administration craves much more.
They need control over the levers backstopping fragile Bubble markets – more specifically, QE and the Fed’s balance sheet.
They are fixated on ensuring Bubble inflation continues through the midterms.
Lower rates are only the initial gambit.
To ensure things don’t blow up before the next red sweep, they need to ensure that their central bankers are ready to move quickly and forcefully to counter fledgling market instability.
Essentially, the objective is to meld the expeditious “Trump put” with the formidable open-ended “Fed put.”
The freakish lovechild would (“on paper”) be the most powerful market, financial, and economic expedient in the long and sordid history of inflationism: The “MAGA Fed put.”
Before dismissing my little “MAGA Fed Put” hypothesis, contemplate current financial structure.
Runaway Bubbles have degraded into a monumental financial scheme.
Debt growth is out of control, with unsustainable deficit spending significantly financed through leveraged speculation.
Seemingly endless liquidity is available to finance even the wildest ideas, including tens of Trillions for the craziest ever AI arms race.
With out-of-control over-issuance of non-productive debt as far as the eye can see, stable bond prices are necessary to hold destabilizing deleveraging at bay.
Ever-rising stock prices are required to sustain an epic mania and speculative Bubble.
And this fragile structure now requires uninterrupted massive system Credit growth, which is somehow supposed to equate with “price stability.”
“House of cards” does not do justice.
Meanwhile, the Scourge of Inflationism has worked decades of black magic on a deeply troubled and divided society and political parties these days essentially in civil war.
All hell breaks loose when Bubbles burst.
Whether they appreciate the details and nuance, top Trump officials recognize the imperative of maintaining market confidence.
It’s a cast of characters assembled to star in the social media and reality TV drama, “Confidence Game”.
Replace Cook with a loyalist, and then get to work on February regional Fed President reappointments.
Keep the narrative on lower policy rates, while preparing Fed officials to unleash early QE in the event of a spike in 10-year yields and/or marketplace liquidity issues.
Convince the hedge funds of the potency of “MAGA Fed put,” and it won’t be necessary to resort to it.
Frame it all in terms of supporting housing and American families, while working tirelessly to accommodate the demands of leveraged speculators.
Stoking further Bubble excess is an unmitigated disaster.
And that’s precisely what the administration will be hell bent on doing for the next 14 months.
Little wonder gold was up another $76 this week to a record $3,447.95.
August 29 – Bloomberg (Erik Larson, Zoe Tillman, Bob Van Voris, and Greg Stohr):
“Most of President Donald Trump’s global tariffs were ruled illegal by a federal appeals court that found he exceeded his authority by imposing them through an emergency law, but the judges let the levies stay in place while the case proceeds.
The US Court of Appeals for the Federal Circuit on Friday upheld an earlier ruling by the Court of International Trade that Trump wrongfully invoked the law to hit nations across the globe with steep tariffs.
But the appellate judges said the lower court should revisit its decision to block the tariffs for everyone, rather than just the parties in the case.
‘The statute bestows significant authority on the President to undertake a number of actions in response to a declared national emergency, but none of these actions explicitly include the power to impose tariffs, duties, or the like, or the power to tax,’ the court said.”
I doubt the administration pulls off its Perilous Bubble Scheme.
It’s just gotten too crazy.
Perhaps checks and balances have a pulse.
As the US Court of Appeals reminds, the judicial branch at least holds some cards.
How aligned is SCOTUS with MAGA?
And to see the global bond vigilantes so focusing their attention on spendthrift governments raises serious doubts.
Treasuries, AI and crypto all appear vulnerable.
It’s worth noting that this week’s Gallup poll had the President’s job approval at 31% with independents.
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