Morning from Copenhagen.

The absurd intraday volatility continues in bond yields, equities, and other risk assets as markets begin to chase a reaction from the Fed to counter the chaos in the White House. Trump’s tariff show is beginning to resemble a U.S. version of the Liz Truss fiasco in the UK. But while the bond market may be screaming for help, is it really in the Fed’s interest to step in?

First, it’s worth remembering that the central bank’s primary role is to maintain a well-functioning financial system—not just to manage inflation or employment. This obviously speaks in favor of intervening through a new facility, or ending QT early, to support the Treasury market. There is no functioning financial system without a functioning Treasury market—which marks a key difference between now and the Gilt crisis under Truss.

It’s easy to see how bond markets have started to price in Fed action. Forward inflation swaps have plunged in response to the deteriorating growth outlook, while term premia—normally aligned with inflation volatility—have spiked sharply. The divergence in rate-of-change terms between those two metrics is striking and signals that the market is demanding a policy response.

So why wouldn’t the Fed intervene, even if it’s arguably in their own best interest?

Because doing so would effectively be perceived as endorsing or at the very least prolonging Trump’s recent policies. Even if the Fed steps in solely to support the Treasury market, it risks sending a signal that it will provide stimulus whenever markets wobble as a result of Trump’s economic strategy—potentially emboldening him to push even harder.

The bizarre tit-for-tat game of chicken between the US and China is likely to continue—especially if the Fed decides to support the U.S. Treasury market.

Chart 1: Bond Yields Are No Longer About Growth – The Policy Premium Is Back