Hedge funds are preparing new strategies because U.S. President Donald Trump might remove Federal Reserve Chair Jerome Powell before his term ends which could create market instability and alter interest rate expectations.
The speculation about Trump removing Powell intensified after media reports emerged before the president denied any plans to do so. The dollar experienced a brief decline while long-term Treasury yields increased following the news.
The $491 billion investment group RBC BlueBay Asset Management together with its other units has started purchasing short-term Treasuries while selling 30-year bonds as part of their curve trade strategy. A new Federal Reserve chair would probably face intense pressure to reduce interest rates aggressively which would decrease short-term bond yields.
Mark Dowding at BlueBay stated that undermining Fed independence would result in rising long-term yields because inflation expectations would increase.
Hedge funds are choosing convertible bonds and short-duration fixed income investments because they predict increased market volatility.
The federal funds rate currently operates at 4.25%-4.5%. Trump has persistently criticized Powell for his slow pace in reducing interest rates while advocating for rates to reach 1%.
The market continues to watch for any indication of political influence on monetary policy despite no official changes because the Federal Reserve operates in a challenging inflation and growth setting.
