Fed Independence Concerns Drive Long-End Yields North: Aug. 27, 2025

The Treasury curve is steepening further today as fixed-income watchers balance greater odds of more rate cuts at the short-end with Fed independence concerns at the long-end. The developing legal battle between President Trump and Federal Reserve Governor Lisa Cook is generating bifurcated shifts across the complex for the second consecutive day, with the monetary policy sensitive tenors from the 2-year maturity and shorter experiencing lighter borrowing costs while the 3-year and longer durations are seeing climbing yields. Meanwhile, the US government debt market faces additional demand tests this afternoon and tomorrow as it gears up for offerings of 5- and 7-year notes totaling $70 billion and $44 billion. Participants will look for clues on how the White House’s confrontation with the Fed is affecting the appetite for domestic obligations after yesterday’s 2-year auction for $68 billion saw strong interest. Stocks are bullish against the backdrop as all sectors advance, with the possibility of well-received results from Nvidia this evening highly likely to drive the S&P 500 index to a new record. But the Russell 2000 is leading the pack yet again, as it’s positioned to benefit significantly from looser financial conditions stemming from a higher likelihood of an incrementally aggressive easing cycle. Elsewhere, the greenback, volatility protection instruments, energy supplies, forecast contracts and bitcoins are also catching bids. Conversely, copper, lumber, silver and gold commodities are facing selling pressure. 

Rate Cuts Don’t Guarantee Cheaper Mortgages

This week’s bifurcation across the yield curve reflects the risk of President Trump confronting the Fed too aggressively. The housing sector is a significant concern for Americans who are facing the worst affordability crisis of all-time and the Commander in Chief blames the central bank for being far too tight. It’s a situation that hits home as the Head of State has been a real estate pioneer since a very young age, learning the business from his late father, Fred. He’s correct to an extent as the monetary policy authority does influence duration, however, an important consideration is that 15- and 30-year financing costs, which are what affect mortgages, aren’t guaranteed to come down if overnight rates do. Preserving the autonomy of the Fed is critical to contain interest cost pressures and the strength of the greenback over the long run, but in all fairness, accountability by its leaders amidst disciplined oversight is also a notable contemplation.

International Roundup

China’s Industrial Profit Decline Slows

The decline in China’s industrial profits eased in July, a result of the country cracking down on price wars and utilizing domestically produced semiconductor chips as an alternative to US products. July earnings sank 1.5% year over year (y/y) compared to declines of 4.3% and 9.1% in June and May. Economists anticipated a 5.8% y/y contraction. Encouragingly, manufacturing profit growth accelerated from 1.4% in June to 6.8% with steelmakers, petroleum refiners and providers of raw materials becoming profitable. In an official statement, Beijing reported that chip-related companies experienced a 176% y/y increase in earnings, a result of ramping up production in response to the US banning exports of certain high-tech products to the country.

Business Confidence Improves in South Korea

Business confidence strengthened this month to the highest level of the year after having fallen in July and June, according to the Bank of Korea (BOK). The August Composite Business Sentiment Index for all industries hit 91, up one point from the preceding month. The index’s gauge of business views of the future strengthened, reaching 91.8. The composite gauge tracks corporate prospect in five manufacturing sector and four other categories. The manufacturing subindex climbed 1.4 points to 93.3 while the nonmanufacturing category was up 0.7 points to 89.4. The BOK believes the improved sentiment is a result of the country reaching a trade deal in which the US imposes a 15% tax on imports from the country. The rate is near the average and lower than many other countries face. Additionally, the deal helped resolve uncertainty about South Korea’s trading relationship with the US.