What are Treasury bonds really? They’re a bet that US institutions and norms are guaranteed to keep the car on the road. The world expects from the United States (relatively) moderate inflation, clear jurisprudence, political stability, trade cleared in dollars, and a big army to back this all up. Past ‘crises’ – debt-ceiling brinkmanship, quality downgrades from rating agencies, liquidity spooks – have failed to realize any lasting damage to demand for US Treasury securities. Events that should negatively affect the credit quality of the United States government lead to increases in the prices of US debt. After the weirdness of the bond market last week momentarily broke the flight to safety pattern, we need to ask: What could actually break global demand for US Treasuries once and for all? Whatever the catalyst, the buildup will be nonlinear: incremental stresses will accumulate until some financial rupture – I’m looking at you hedge funds – breaks market confidence. Here are some of the main pressure points I’m watching right now.

The Fed Swap Lines have deputized the Fed as a lender of last resort during dollar-denominated liquidity crises in other countries. Foreign private banks, who want assets in dollars, fund long-term dollar assets with short-term dollar debt. The maturity mismatch has been prime for bank-run psychology. In 2007, as the global financial crisis destroyed credit confidence, foreign banks required increasing cash in dollars to cover their dollar exposures, leading to a drought in the supply of foreign dollars. The Fed, fearing contagion, opened a $550 billion swap line with foreign central banks. Through the swap lines, the Fed sends dollars to another foreign bank in exchange for foreign currency, the central bank lends those dollars to private foreign banks, who pay dollar loans back to the foreign central bank, who then pay the dollars and interest back to the Fed. I wonder how the Trump administration feels about dollar-denominated, ‘free’ bailouts of foreign banks? Also, in a post-Chevron Deference world, the legal case for the swap lines is getting murkier1.

The concept of Fed Independence is a bit of a bogeyman in the history of the central bank. It’s often conjured as an argument against whichever new policy the Fed happens to be executing at the time – for example with the first use of swap lines as emergency liquidity with Mexico in the mid-1990s. However, actual threats to the perceived independence of the Fed need to be taken very seriously. The US Federal Reserve was created in 1913 as an independent executive agency, whose Board of Governors and Chair are selected by the President for set terms and cannot be removed except ‘for cause.’

This shield from ousting on a political whim allows the market to have faith in monetary policy matching the prevailing economic positions. A fireable Fed Chair could be replaced by the President until that person acquiesced to politically
expedient rate shifts and money printing. We would have ZIRPs in the lead up to presidential elections and mini ZIRPs before the midterms without a concurrent, lasting growth in the real economy. Inflation would run rampant as fiscal spending
could be covered by undisciplined money printing and buying Treasuries. The belief that the Fed will raise interest rates to manage price levels – even if that decision is not politically convenient – allows US debt to carry a small inflation-risk premium. An irrevocable shaking of that faith would turn US Treasuries into another emerging market IOU.

By the way, yes, the independence of the US Federal Reserve is facing a credible threat. Yesterday – Thursday April 17 – President Trump vented his frustrations with Chairman Jerome Powell’s refusal to lower interest rates. White House leaks have admitted that he’s been talking about firing Powell ‘for months’2. But you, the reader, ask incredulously, “I thought the President cannot fire the Chairperson of the Federal Reserve without cause?” The protection I mentioned has been eroded by the application of the unitary executive theory, a long-standing conservative jurisprudence project to strengthen the President’s ability to fire employees within executive agencies and to utilize discretion in implementing laws3. The most immediately relevant impediment to the unitary executive is the 1935 Supreme Court case Humphrey’s Executor v. United States, which ruled that President Franklin Roosevelt could not fire a member of the Federal Trade Commission based on political differences. The modern incarnation, Wilcox v. Trump, centers around President Trump’s ability to fire Gwynne Wilcox, a National Labor Relations Board Member.

After the DC Circuit Court of Appeals issued an order to reinstate Wilcox, Chief Justice Roberts stepped in and issued a stay on the order4. I believe if the Supreme Court takes up this case, Humphrey’s Executor will fall.

Fortunately, the Supreme Court is ready to save the Fed! Justice Alito – certainly prounitary executive – called the Fed “a unique institution with a unique historical background”5 in a dissent over the funding of the Consumer Financial Protection Bureau. This is a thin paper shield that probably will not withstand legal scrutiny, but the existence of said shield is evidence that even the Justices interested in a more powerful executive branch recognize the importance of preserving the Fed’s independence.

Finally, Treasuries are ripe for usage in the geopolitical theater. They’re the US’s main export; they’re inextricably linked to domestic policy; they’re the underpinnings of the financial system. In the week following liberation day, Trump showed his tolerance for volatility in equity markets, but the near meltdown in the financial system driven by swings in the bond market had a real impact on his tariff implementation. While this was good for global financial markets, it was likely bad for the Administration’s negotiating position in bilateral trade deals. Around one quarter of the US’s total debt is held internationally6, of which Japan and China are the largest holders. As the US tries to negotiate trade deals, isolate China, or restructure its debt, an unhappy foreign actor could wreak havoc with the stability of the US debt market. An all-out fire-sale is unlikely – selling reserves en masse hurts the seller too – any large portfolio shifts during geopolitical events could still affect liquidity, steepen the curve, and rattle downstream risk assets.

1. Perry, A.R. (2020) “The Federal Reserve’s Questionable Legal Basis for Foreign Central Bank Liquidity Swaps.” Columbia Law Review, 120(3), 729-68. https://www.columbialawreview.org/content/the-federal-reservesquestionable-legal-basis-for-foreign-central-bank-liquidity-swaps/
2. Schwartz, Brian & Timiraos, Nick. (17 April 2025) “Trump Has for Months Privately Discussed Firing Fed Chair Powell”. The Wall Street Journal. https://www.wsj.com/economy/central-banking/trump-has-for-monthsprivately-discussed-firing-fed-chair-powell-628d3d79
3. I’d honestly like to say that I’m relatively sympathetic to the Constitutional arguments, and that I mostly blame this whole mess on Congress for ceding all of their oversight and regulatory powers for the last 40 years.
4. Liptak, A. (9 April 2025). “Supreme Court Sides With Trump, for Now, on Firing Agencies’ Leaders”. The New York Times.
   https://www.nytimes.com/2025/04/09/us/politics/trump-supreme-courtagency-leaders-firings.html
5. Consumer Financial Protection Bureau et al v. Community Financial Services Association of America, LTD., et al. 601 U.S. 21 (16 May 2024). https://www.supremecourt.gov/opinions/23pdf/22-448_o7jp.pdf
6. U.S. Department of the Treasury. Fiscal Service, Federal Debt Held by Foreign and International Investors [FDHBFIN], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/FDHBFIN.

Steven J. Wagner, Investment Adviser
Bray Farm Income Advisory LLC
3375 Brookdale Drive, Pittsburgh PA 15241
412.504.9412
412.848.2410 (cell)

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