By Karen Brettell
July 24 (Reuters) – Federal Reserve Chairman Kevin Warsh wanted a central bank that talked less and let the data speak. Now, markets are speaking for him – loudly.
A sharp Treasury selloff has pushed some longer-dated yields to their highest levels since the financial crisis and is raising the question of whether larger moves will become the “new normal” now that the Fed has pared back its guidance.
Two-year yields have climbed to a recent 4.37%, their highest since February 2025, while benchmark 10-year yields were at 4.71% on Thursday, the highest since January 2025.
Thirty-year yields, at 5.19%, were nearing a threshold not breached since 2007, and 30-year real yields – which strip out expected inflation – reached 2.98%, their highest since 2008.
The immediate trigger is geopolitical. Gennadiy Goldberg, head of U.S. rates strategy at TD Securities, says the selloff reflects a rapid repricing of Fed expectations as rising oil prices and uncertainty over the duration of the Iran conflict stoke inflation fears.
A resilient U.S. economy, combined with Warsh’s lighter-touch approach to guiding markets, is compounding the move.
“That’s partly a function of a lack of forward guidance from the Fed by design,” Goldberg said. “And partly it’s a function of the economic data being relatively firm and no real clarity for markets on the geopolitical conflict.”
REAL YIELDS LEAD THE MOVE
Real yields have led the charge, a sign that traders are repricing their expected Fed path, said Leslie Falconio, head of taxable fixed income strategy at UBS Global Wealth Management.
“Most of this rise is really by the real yield component, which is repricing the terminal Fed funds rate, and the fact that the growth outlook currently still remains on solid footing,” Falconio said.
Markets now expect the Fed’s benchmark rate to peak near 4.23% next June, up from its current 3.50%-3.75% range.
Odds of further hikes were pared after the U.S. and Iran struck a ceasefire in June, but renewed fighting flipped those bets and lingering questions over how the Fed will respond are adding to the uncertainty.
That uncertainty is amplified by Warsh’s approach to the Fed. His strategy aims to wean markets off Fed forecasts in favor of incoming data, a sharp break from Jerome Powell’s playbook of telegraphing policy so decisions never blindsided investors.
“We got so used to eight years of the Powell Fed where they really didn’t want to go into the pre-communications blackout with market expectations divergent from what the Fed was going to do,” said Will Compernolle, macro strategist at FHN Financial.
“It’s very possible that Warsh’s perspective is that the market shouldn’t be following them inch by inch based on what they’re saying.”
The result is whiplash: fed funds futures now price 38% odds of a hike at its meeting next week, up from just 12% a week earlier.
Goldberg notes that even holding rates steady would mark the second-largest gap between market expectations and Fed policy in a decade, while an actual hike would be the largest mispricing in that span, eclipsing the shock of September 2024’s surprise 50-basis-point cut.
A KITCHEN SINK OF OTHER WORRIES
The Fed and oil prices aren’t the only factors behind the bond market’s weakness. Fiscal concerns are also weighing on longer-dated debt as the Iran conflict grinds on. Defense Secretary Pete Hegseth said Tuesday its cost has climbed to $37.5 billion.
The Treasury Department is also due to deliver its next quarterly funding update on August 5, and traders will be watching for whether it drops language pledging to hold auction sizes steady “for at least the next several quarters,” a shift that would signal bigger sales of longer-dated debt ahead.
Thin economic data and skittish positioning as investors unwind bets on lower rates are adding fuel to the fire.
Yet strategists caution against reading too much into the fiscal angle.
“The driver of the long end is growth and inflation,” Falconio said.
UBS doubts the Fed will actually hike, since oil-driven supply inflation is unlikely to move policy, a dynamic that makes current yields attractive, she said, noting that interest rate risk “is cheap to spread products, it’s cheap to equity.”
Both Falconio and Goldberg point to a contained term premium – the extra compensation investors demand for holding longer-term bonds rather than shorter-term debt – as evidence that debt-supply fears haven’t hijacked the long end of the curve. The premium of 10-year notes is around 70 basis points, a fraction of the peak levels reached during the financial crisis.
That likely leaves the economy and Fed policy as the market’s main drivers for now, which may mean more volatility, not less.
“There is just lots and lots of uncertainty about inflation going forward, and conviction levels among investors are very low,” Goldberg said.
(Reporting by Karen Brettell; Editing by Kim Coghill)
