By Suzanne McGee
Jan 15 (Reuters) – U.S. bond investors are bracing for higher long-term yields as a criminal investigation into Federal Reserve Chair Jerome Powell has fueled expectations of elevated inflation, a move that could end up amplifying affordability concerns.
The probe from the Department of Justice drew a sharp rebuke from Powell when he revealed it over the weekend, calling the move a “pretext” to influence interest rates. President Donald Trump has demanded the Fed cut rates sharply since resuming office last January, and frequently criticized Powell for not responding.
Investors fear any erosion of confidence in the Fed’s independence and commitment to price stability could lift inflation expectations, driving a steeper yield curve going forward as market participants demand extra compensation to hold longer-dated Treasuries. That could ripple through credit markets and impact affordability, a top concern for voters, as mortgage rates are tied to long-term yields.
“Any time the executive branch tries to jawbone the Fed into keeping policy rates lower than they otherwise would be, it ends up backfiring,” said Thierry Wizman, global rates and currency strategist at Macquarie Group. He said he remains a buyer of “steepeners”, or trades that expect the yield gap between 2-year and 10-year Treasuries to widen further.
Worries about higher inflation expectations have shown up in long-term breakevens, a gauge of investors’ inflation outlook. The U.S. 10-year breakeven inflation surged late on Tuesday to 2.29%, the highest since early November.
“This growing fight between the White House and Federal Reserve could lead to higher rates and complicate efforts to revive the housing market,” Jeremy Barnum, CFO of JPMorgan, told reporters on Tuesday on a call to discuss the bank’s fourth-quarter 2025 earnings.
“The broad market narrative here is that loss of Fed independence tends to lead to steeper yield curves and other damage to ongoing economic dynamism.”
Robin Vince, CEO of BNY, voiced similar concerns on BNY’s post-earnings conference call on Tuesday morning.
“Let’s not shake the foundation of the bond market and potentially do something that could cause interest rates to actually get pushed up because somehow there’s lack of confidence in the Fed’s independence,” Vince told reporters.
The U.S. 2/10 yield curve briefly steepened to 67.10 basis points on Monday as ongoing concerns about a less independent Fed re-emerged, but the gap has since narrowed.
Asked about investor expectations for a steeper yield curve that could potentially impact mortgage rates, a White House spokesman said: “The Trump administration is committed to restoring the United States as the most dynamic economy in the world and ensuring that financial markets have confidence and trust in our nation’s monetary policy.”
Investors already had been pricing in a steeper yield curve in 2026, even before the criminal probe into Powell became public on Sunday.
With the Fed in the midst of an easing cycle, market participants have been buying the shorter end of the curve, such as 2-year and 5-year notes, but selling 10-year debt and 30-year bonds amid persistent worries about the high U.S. fiscal deficit.
“When we’re not sure where policies are going, that’s when we will demand higher yields to be enticed to invest in the Treasuries,” said David Hoag, a fixed income portfolio manager at Capital Group.
NOT AN ENTICING TRADEOFF
Hoag said investors are caught between two relatively unattractive options: buying short-term Treasury notes that offer less in the way of yields and therefore return, or taking the risk of moving further out in duration to own 10-year Treasuries in hopes of capturing some extra yield. The risk they run is that a Fed that prioritizes cutting interest rates may struggle to keep inflation under control.
It is not an enticing tradeoff, Hoag acknowledged. “Welcome to my world,” he said.
U.S. Treasury market participants and analysts believe there is still plenty of room for the yield curve to steepen. As of late Wednesday, investors could capture an extra 62.40 basis points of yield buying 10-year Treasury bonds rather than their two-year counterparts, according to LSEG data.
While that spread has widened significantly since Trump’s re-election in November 2024 and is much wider than a three-month low of 45 basis points hit in November 2025, it remains below the longer-term average of 1.27%, or 127 basis points, said Sweta Singh, co-founder of City Different Investments, a Santa Fe-based asset manager.
“There is still tons of room for the curve to steepen,” Singh said.
Seth Meyer, global head of client portfolio management at Janus Henderson Investors, said he continues to hold Treasury and other bond positions that bet on a yield curve steepening, or a decline in the prices of longer-duration bonds as investors insist on more yield.
“We are historically still flat; we’re flat when compared to other developed nations,” Meyer said.
To be sure, rates on longer-dated bonds have remained surprisingly stable in spite of the increased political rhetoric. On Monday, the yield on the 10-year Treasury ticked only slightly higher before dipping on Wednesday afternoon to 4.142%.
Believers in a steeper yield curve are not capitulating, however, citing the uncertainty and rapid-fire rate at which new policies and comments emerge from the White House.
“We have new dominoes falling every day,” Singh said.
(Suzanne McGee in Providence, RI; additional reporting by Gertrude Chavez-Dreyfuss; editing by Megan Davies and Nia Williams)
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