Bond Yields at 19-Year High Send Warsh Credibility Warning

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(Bloomberg) — The message from the bond market was clear: For all of Federal Reserve Chairman Kevin Warsh’s tough talk about taming inflation, he’s not rushing fast enough to deliver.

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After the Fed kept interest rates unchanged for a seventh consecutive month, investors dumped 30-year Treasury bonds, sending the yield shooting up as much as 14 basis points to nearly 5.23%, a 19-year high. Market measures of inflation expectations rose, the dollar slid, and even stocks tumbled as investors wagered Warsh was only delaying an inevitable rate hike.  

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The moves revealed investors are growing increasingly concerned that Warsh won’t manage to rein in inflation that has run above the Fed’s target for five straight years. 

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As a result, bondholders both pushed down yields on the most short-term Treasuries — a reflection of how they rapidly scaled back bets on immediate increases — and demanded higher payouts on longer-term bonds to compensate for inflation risks in the years ahead. The drop in two-year yields coupled with the rise in 30-year rates made for one of the biggest such steepenings of the yield curve after a Fed meeting since at least the mid-1990s.

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That steepening indicates Warsh’s “policy strategy lacks credibility,” said Ben Emons, managing director of fixed income at Highline Asset Management and founder of FedWatch Advisors. 

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“Being hawkish without taking action is a convenient way to let markets judge for themselves and let markets tighten Fed policy,” Emons said. But, he noted, “this could backfire when inflation accelerates, and the market judges the Fed is once again behind the curve.”

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Treasuries extended losses on Thursday, with the yield on 30-year bonds rising as much as four basis points to 5.24%. Benchmark 10-year yields climbed one basis point to 4.69% and remain within touching distance of the highest levels since January 2025.

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The decision to hold the benchmark rate steady at 3.5% to 3.75%, where it has been since the central bank’s last cut in December, comes a little over two months since Warsh was elevated by President Donald Trump to lead the Fed.

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Trump has downplayed inflation and repeatedly lashed out at Warsh’s predecessor Jerome Powell for not slashing  rates. That fanned fears about Fed’s continued political independence, which is key to its credibility.

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What Bloomberg Strategists say:

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“It may be the Fed’s inflation-fighting credibility that’s in question, but the consequences are unlikely to stop at the US Treasury market. Correlations between US and G10 30-year government bond yields are high. Canada, given its close economic integration with the US, is understandably the most exposed. Europe is not far behind — arguably unfairly so, given the ECB has already hiked and faces a much less severe inflation problem than the Fed.”

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Since his first meeting last month, though, Warsh has repeatedly emphasized that the Fed will do what it takes to bring inflation back to its 2% target.