(The opinions expressed here are those of the author, a columnist for Reuters)

LONDON - U.S. Treasuries seem increasingly anxious about 2026 and the bond market is already rebuilding risk premia ahead of the new year. Even with more interest rate cuts likely, the looming change at the top of ‍the Federal Reserve sits uneasily on sentiment.

On Monday, ‍the Treasury yield curve steepened to its widest in four years on both the 2-10 year and 2-30 year segments, with the former surpassing the peaks of April when the ​initial tariff shock briefly sent Treasuries into a tailspin.

What's more, the New York Fed's measure of the 10-year term premium - an estimate of the extra compensation investors require for buying and holding longer U.S. debt - has started to creep higher ⁠again. It hit a three-month high last week, returning to levels near the 10-year highs earlier this year.

There are plenty of near-term crosscurrents.

This week alone, the Treasury market is bracing for Tuesday's first up-to-date U.S. employment report since ⁠before the ‌government shutdown in September, an October inflation readout a day later, a 20-year bond auction and then a likely rise in the Bank of Japan interest rate that may ruffle world bond markets.

Any one of these events could spark a rethink and sharp price moves. But none of them, on their own, looks like a fundamental game-changer for long-term risk premia. What really ⁠unnerves investors is persistent concerns about a shift in the Fed's reaction function under growing political pressure on what was once an operationally independent central bank.

Direct political influence raises basic questions: what level of inflation will the Fed be willing to tolerate over time, and how far will it be prepared to cut interest rates without achieving its 2% inflation goal?

That combination - heightened long-term inflation uncertainty and a blurred policy framework for addressing it - is precisely what warrants higher risk premia. Those forces were largely absent in the post-2008 era of repeated quantitative easing and slow, disinflationary growth.

At the apex of Fed concerns is who U.S. President ⁠Donald Trump appoints to replace Jerome Powell as chair when his ​term expires in May. The psychodrama has played out all year and is now coming to a head, with a final decision expected as soon as January.

KEVINS ABOVE

The latest episode in the saga came last Friday when Trump told the Wall Street Journal he has ‍narrowed his search for a new Fed chair to two people - former Fed Governor Kevin Warsh or National Economic Council Director Kevin Hassett.

"The two Kevins are great," Trump said.

The Polymarket betting site, which had Hassett as clear favorite prior to Trump's comments, cut his chances of ​getting the Fed job to 44% from 75%. Warsh's chances zoomed to 46% from 14%.

With JPMorgan boss Jamie Dimon reportedly favoring a Warsh pick and many in the markets assuming Hassett would be the more politically malleable of the two, Warsh's improved odds may be seen as something of a balm for the market.

But the picture is shifting on several fronts.

The rearguard in the orthodox wing of the central bank is feeling emboldened, even after three straight rate cuts through last week with inflation still a full percentage point above its target.

Two of the more hawkish regional Fed presidents - Dallas Fed chief Lorie Logan and Cleveland Fed boss Beth Hammack - are due to rotate onto the policymaking committee next year. That rotation, at least on paper, tilts the committee toward tighter policy.

Meanwhile, doubts that a Trump-dominated board might refuse to reappoint existing regional Fed leaders were put aside when they were reinstated early last week.

Signals from last week's meeting also suggested the Fed is on hold through the first quarter – barring some jarring data twist.

Even so, there's been considerable attention on the Fed's decision on Thursday to follow an end to its balance sheet rundown this month with active purchases of Treasury bills.

While this is largely explained as a technical liquidity management to keep the funds rate within its target band, the timing raised eyebrows, ⁠given the Treasury's plan to frontload more of its borrowing into short-dated bills as well. For some, that coincidence simply cemented perceptions of growing ‌political influence over the Fed. From a market point of view, it raises as many questions as it answers about injecting additional liquidity into bubble-like markets with already loose financial conditions and elevated inflation.

For TS Lombard economist Steven Blitz, that move amounted to nothing short of an effective "Treasury/Fed merger" that reasonably explains why inflation risk premia are back on the rise. Whoever gets the Fed job, Treasury Secretary Scott "Bessent will be his boss", he added. The ‌Fed, and indeed Treasury, may ⁠have its work cut out to put those concerns to rest in 2026 - assuming they even want to.

The opinions expressed here are those of the author, a columnist for Reuters

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(by Mike Dolan; Editing by Marguerita Choy)