Barclays and HSBC analysts have noted an increased appeal in inflation-linked debt, specifically Treasury Inflation-Protected Securities (TIPS), following recent statements from Federal Reserve Chair Kevin Warsh. Warsh has expressed intentions to bring inflation down and has formed several policy review task forces, including one focused on inflation measurement reform. This has created uncertainty around how inflation will be measured in the future, which has led investors to demand higher real yields on TIPS to compensate for potential changes that could lower reported CPI.
Warsh's remarks, made during his confirmation testimony in April and more recently when announcing the task forces, have raised concerns that the US government might revise inflation measures. Such revisions could mechanically compress TIPS breakevens by lowering the expected inflation component of the TIPS return. This uncertainty has already manifested in the market, with an episode during a 2025 government shutdown where real yields on short-dated TIPS surged from 2% to over 8% due to temporary suspension of CPI data publication.
The market reaction suggests that Warsh's pronouncements are being interpreted as a policy direction that could lead to higher long-term US interest rates. While it's unlikely that all of the recent rise in TIPS' real yields is solely due to the inflation task force, analysts believe it has undeniably impacted TIPS valuation. Other task forces, such as those on the Fed's balance sheet and AI, are also anticipated to influence market expectations, potentially leading to reduced Fed purchases of long-dated securities and higher Treasury term premiums.
