Federal Reserve will need emergency QE if Treasury yields sustain surge above 5%

The Federal Reserve will need to launch emergency quantitative easing if Treasury yields keep climbing above 5%, Deutsche Bank said Wednesday, after the 30-year yield briefly hit 5.02%—the highest since November 2023.

That spike came as investors dumped long-term US debt, reacting to Donald Trump’s trade tariffs and rising fears that US assets are no longer safe.

The warning came directly from George Saravelos, global head of FX strategy at Deutsche. He said in a note that “if recent disruption in the US Treasury market continues, we see no other option for the Fed but to step in with emergency purchases of US Treasuries to stabilize the bond market.”

George called it a “circuit breaker.” The last time something like this happened was in 2020, when the Fed slashed rates and started a massive bond-buying program to stop a COVID-era financial collapse.

Fed holds back despite chaos in bond market

The Fed hasn’t made any moves yet. No announcements, no liquidity support, no signal that it’s ready to jump in. Meanwhile, the selloff in Treasuries is picking up speed. The 5.02% yield number is now in play, and if that continues, Jerome Powell and his team will have no room left to wait it out.

George said the real problem isn’t just yields—it’s policy. He said that “a reversal of the Trump administration’s policies would be necessary to stabilize medium-term shifts.” The chaos in the market isn’t just about interest rates or inflation. It’s about trust. And right now, that trust is breaking down.

Deutsche called the dollar’s collapse a “crisis of confidence.” On Wednesday, the greenback fell against most major currencies. Instead of buying dollars like they normally would during times of stress, foreign investors are actively dumping US assets altogether. “The market has lost faith in US assets, so that instead of closing the asset-liability mismatch by hoarding dollar liquidity it is actively selling down the US assets themselves,” George said.

Economists say Fed is stuck with inflation and bad timing

Michael Gapen, chief US economist at Morgan Stanley, said the Fed isn’t going to cut interest rates anytime soon. Speaking Monday on Bloomberg TV, Michael said, “If we don’t get a recession, it’s going to be hard for the Fed to look through this inflation in the short run. The Fed’s going to be on hold for the foreseeable future.”

The problem is, inflation is still hot. The Fed’s preferred inflation gauge hit 2.8% in the 12 months through February—way over their 2% target—and that number came before the new Trump tariffs even had time to jack up prices. On top of that, inflation expectations are rising. One of the long-term metrics the Fed watches has now ticked up for three straight months.

The Fed has a long history of stepping in when markets fall apart. In March 2020, right after the US started pandemic lockdowns, the Fed made an emergency rate cut outside of a regular meeting. It was a panic move—but it worked.

Even as stocks plunge and consumer sentiment slides, Powell isn’t blinking. He said Friday that the Fed has an “obligation” to keep expectations anchored and claimed the current rate levels are “well-positioned.” Powell said the economy is “still in a good place,” based on the latest data, and didn’t even bring up the stock market drop.

Some analysts believe the longer the tariffs stay, the worse things will get. If yields stay high and foreign investors keep bailing, a full-scale financial slowdown is back on the table. The Fed might be hoping to wait it out, but if bond yields don’t back down, they may have no choice left but to step in and buy. Whether they like it or not.

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