Investors are closely watching Federal Reserve Chair Kevin Warsh's first Jackson Hole speech this week, as a lack of clear guidance could exacerbate a selloff in long-dated US Treasuries. The yield on 30-year bonds recently hit its highest level since 2007, reflecting persistent inflation concerns and rising US national debt, which has surpassed $40 trillion. This pressure on long-term borrowing costs has prompted US Treasury Secretary Scott Bessent to intervene by increasing buybacks of 10- to 30-year bonds, initially doubling them from $2 billion to $4 billion per operation, though the market remained unconvinced and yields rose again.
Warsh's silence on his inflation views has left markets guessing, contributing to bond market volatility. Short-term yields fell after his last press conference, while 30-year Treasury yields climbed, and the average 30-year mortgage rate rose to approximately 6.75%. This divergence suggests investors believe the Fed might tolerate higher near-term inflation, potentially leading to larger rate increases later. The market's expectation for a September rate hike, as indicated by CME's FedWatch tool, has dropped to around 40% from 55% a month ago.
The dynamic between the Fed and the Treasury creates an unusual tension, as Bessent is actively trying to suppress long-term yields while Warsh appears content to allow market forces to tighten conditions. This situation raises questions about the Fed's inflation-fighting credibility if it seems to be adjusting monetary policy to limit government borrowing costs. Analysts are looking for Warsh to clarify the conditions for future rate hikes, address the rise in long-term yields, and define the relationship between the Fed and the Treasury's actions, all without abandoning his stance on making markets less dependent on Fed guidance.
