Concerns are rising regarding the safety of U.S. assets as President Donald Trump’s intensifying trade war exacerbates Treasury sell-offs. On Wednesday, the yield on the benchmark 30-year Treasury note briefly soared to 5.02%, marking its highest level in 2023. If this trend continues, analysts from Deutsche Bank AG and Jefferies are urging action from the Federal Reserve, although they propose different strategies for intervention.

Need for Fed Intervention

George Saravelos, the global head of FX strategy at Deutsche Bank, argues that the Federal Reserve must implement emergency measures—specifically, a return to quantitative easing. He emphasized, “If the current turbulence in the U.S. Treasury market persists, the Fed will have no choice but to engage in emergency Treasury purchases to bring stability back to the bond market.” This isn’t without precedent; in 2020, the Fed cut interest rates and initiated a large-scale quantitative easing program to mitigate the financial repercussions of the COVID-19 pandemic.

• 2020: Fed’s aggressive measures to stabilize the economy
• 2022: The Bank of England intervened to purchase gilts after financial instability arose from unfunded tax cuts proposed by former Prime Minister Liz Truss.

Diverging Opinions on Strategies

On the other hand, Jefferies’ senior economist, Thomas Simons, believes that while volatility is increasing in Treasuries, the solution does not lie in further quantitative easing. He cautioned against mass purchases of Treasuries, stating, “Such an approach may raise concerns about debt monetization in the U.S. and could deter foreign investors from the market.” Simons expressed skepticism about the Fed resuming bond purchases anytime soon.

Instead, he suggested the Fed could revisit strategies employed during previous crises, such as exempting Treasuries and bank deposits from the supplementary leverage ratio. This would enable dealers to hold more securities, alleviating some selling pressure. Simons hinted that an announcement could come as early as Wednesday, depending on market conditions. He stated, “Reinstating this policy would significantly aid in stabilizing the Treasury market before conditions worsen.”

Fed’s Current Stance

Despite the rising volatility, the Federal Reserve has not indicated any imminent actions to support market liquidity or reduce interest rates. While a Fed intervention could provide temporary relief, Saravelos argues that a broader reassessment of the Trump administration’s policies is necessary for longer-term stability.

One major concern is the declining strength of the U.S. dollar, which Deutsche Bank describes as indicative of a crisis of confidence in the once-reliable currency. Instead of investing in the dollar, global investors are moving away from it at an unprecedented rate. On Wednesday, the dollar continued to weaken against other major currencies, reflecting this shift.

Saravelos remarked, “The market has lost trust in U.S. assets, leading to a scenario where investors are not just hoarding dollar liquidity but actively divesting from U.S. assets.” As uncertainty looms, the financial landscape remains unstable, leaving many to wonder what the future holds for U.S. Treasury securities and the broader economy.