Following Federal Reserve Chairman Warsh's hawkish speech at Jackson Hole, market expectations for a September rate hike have climbed, but bond investors remain broadly doubtful that the Fed will actually follow through, given his track record of holding rates steady for several months.
After Warsh reiterated his commitment to curbing inflation on Friday, swap market traders now price in roughly a 60% probability of a rate increase at the Fed's next policy meeting in mid-September. The policy-sensitive two-year US Treasury yield, which posted its largest gain in over two months on Friday, dipped 2 basis points to 4.32% during Asian trading hours.
Despite Warsh's persistent hawkish rhetoric on inflation, his decisions to keep rates unchanged in both June and July have fueled doubts about whether he will act this time. Investors worry that if the Fed holds again, it could intensify credibility concerns, which have already pushed long-end Treasury yields to near two-decade highs. The market's next move will hinge heavily on upcoming economic data. This week's monthly jobs report and subsequent inflation figures will be critical in shaping the Fed's September rate decision, with investors on high alert to assess the direct impact of these numbers on the monetary policy path.
Actions Speak Louder Than Words
Tracy Chen, portfolio manager at Brandywine Global Investment Management, was blunt: "Talk is cheap, but action is what proves it." She maintains an underweight position in long-dated Treasuries, although she has trimmed that stance slightly following the Treasury's announcement this month that it would "at least double" purchases of 10- to 30-year bonds.
Christophe Boucher, chief investment officer at ABN AMRO Investment Solutions, shares similar reservations: "The reaction function remains unclear. If Warsh again refrains from supporting a September hike while inflation stays sticky, credibility concerns could resurface."
Since Warsh took over in May, investors have struggled to adapt to his communication style, which offers limited forward guidance. In a Friday note, ING observed that while Warsh appears reluctant to provide forward guidance, his rhetoric itself carries elements of it. In June, his first press conference as chairman soothed markets by reaffirming the 2% target, sending two-year yields higher and flattening the curve. July, however, triggered the opposite reaction, with the curve steepening by the most since August 2025 as long-end yields climbed, driven by investor perceptions that he failed to articulate the rationale for holding rates steady.
Fiscal Support Prompts Investors to Trim Long-End Underweights
Another source of support for long-dated bonds comes from the fiscal side. The US Treasury said this month it would "at least double" purchases of outstanding 10- to 30-year debt, a fresh development that has prompted some institutions to reduce their underweight positions at the long end. Tracy Chen said she still holds an underweight stance on long-dated bonds but lowered her position following the Treasury's announcement. Daniel Siluk, head of global short-duration and liquidity at Janus Henderson, noted he remains somewhat cautious about duration at the back end of the curve, preferring to hold front-end duration instead.
Data as the Key Variable, Beware of the Market 'Doing the Fed's Job'
Friday's monthly jobs report is the most critical variable on the horizon, following data showing that US employment growth in the year through March was more moderate than previously reported. Warsh has stated that US employment is "performing well," with his focus more on the price stability side, and noted that recent inflation data, while improving, has yet to form a meaningful trend.
George Catrambone, head of fixed income at DWS Americas, cautions that there is a risk of the market "doing the Fed's job" — over-pricing rate hikes that the Fed does not deliver on if data remains subdued. In his view, recent reports on retail sales and employment do not indicate the economy is reaccelerating, making US Treasuries "quite attractive."
Analysts at Goldman Sachs, including George Cole, emphasize the importance of follow-through: "Without clearly favorable inflation news, follow-through will be key. If September is seen as a toss-up and the Fed again holds steady without a clear explanation, the risk of the curve replaying the July FOMC scenario is considerable." Edward Harrison, macro strategist at Markets Live, points out that the initial decline in the 30-year yield following Warsh's hawkish speech suggests increased Fed credibility, which could ultimately help long-duration fixed income assets by pushing down real yields and breakeven inflation rates.
Looking ahead, attention turns to Friday's jobs report and subsequent inflation data for further refinements to September rate-hike pricing.
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