Market veterans on Wall Street are increasingly suggesting that if Kevin Warsh, nominated by President Trump as the next Federal Reserve Chair, takes the helm, the Fed under his leadership could potentially jolt the roughly $31 trillion U.S. Treasury market out of its narrow trading range. They are urging investors to position for lower yields on shorter-duration Treasuries and a steeper yield curve for longer-dated bonds, particularly those maturing in 10 years or more. Many strategists and fixed-income fund managers lean towards the view that a Warsh-led Fed might disrupt the current low-volatility, range-bound pattern in the multi-trillion-dollar Treasury market, reigniting the "curve steepening trade." The core logic behind this is that Warsh could reduce the Fed's formal forward guidance on monetary policy, accelerate balance sheet reduction (quantitative tightening), emphasize AI-driven productivity gains, and increase uncertainty around policy decisions between meetings, thereby boosting Treasury volatility. Simultaneously, if Warsh, under potential pressure from Trump, pushes for sustained interest rate cuts to lower short-end yields, while balance sheet reduction, potentially populist fiscal stimulus widening the deficit, long-term inflation risks, and term premiums support higher long-end yields, the Treasury yield curve would steepen.
During Monday's trading session in the U.S., yields across the Treasury curve generally rose by 2 to 3 basis points, yet the market remains on track for its narrowest monthly trading range since late 2020. As U.S.-Iran negotiations aimed at ending regional geopolitical conflicts reached a stalemate, and with Wall Street widely expecting the Fed to hold its benchmark rate steady this week, the 10-year U.S. Treasury yield, often termed the "anchor for global asset pricing," climbed 3 basis points to 4.33%. This low-volatility environment, at least in cash bond trading, is prompting strategists to focus on longer-term catalysts. This focus comes as Warsh, a former Fed governor and the current nominee, faces a confirmation vote this week, potentially allowing him to succeed Chair Jerome Powell in May.
The concept of a "steepening Treasury yield curve" refers to a scenario where shorter-term yields fall relative to rising or resilient longer-term yields (e.g., 10-year, 30-year), making the overall curve steeper. The core trade involves buying short-duration bonds (betting on lower short-end yields) while adopting a more cautious stance towards long-duration bonds, effectively betting on a steeper curve. If the 10-year yield, the global pricing benchmark, continues to rise against a steepening curve backdrop, it could trigger a fresh wave of valuation pressure on popular risk assets like high-yield corporate bonds, tech stocks, and cryptocurrencies. Sustained increases in yields for 10-year and longer-dated Treasuries equate to a simultaneous occurrence of higher funding costs, weaker liquidity expectations, and a higher discount rate for these core risk assets.
Bets on a steeper yield curve are rekindling as Warsh aims for a "major overhaul" of the Fed. According to a team of senior strategists at Morgan Stanley led by Matthew Hornbach, a Warsh-led Fed might target new inflation metrics, provide less forward guidance (potentially abandoning quarterly economic projections and the "dot plot"), and accelerate balance sheet reduction. These actions "could increase volatility in the Treasury market around each FOMC meeting." They, along with other Wall Street strategists, anticipate that Warsh's policy framework would buoy shorter-term yields and reactivate the long-dormant "curve steepening trade pattern."
The "old Fed framework," established post-2008 financial crisis and reinforced during the pandemic, involved treating a large balance sheet as normal, gradually turning QE and long-term bond holdings into semi-regular tools, managing market expectations via ample reserves and forward guidance/dot plots, and accepting deep Fed involvement in Treasury and mortgage markets. Warsh's advocated "new framework" essentially restores interest rates as the primary tool and relegates the balance sheet to a secondary or emergency role. This means QE would be reserved for the zero lower bound or major crises, with gradual balance sheet reduction, reduced long-term asset holdings, and a diminished Fed fiscal role during normal times. It also involves rebuilding the inflation analysis framework, reducing reliance on the dot plot and excessive guidance, and emphasizing price stability credibility, data quality, and structural factors like productivity and AI.
Warsh's objective may not be traditionally "dovish or hawkish" policy, but rather a fundamental restructuring of the Fed's operational framework: shrinking the balance sheet, reducing the normalization of QE and fiscal-like functions, while utilizing interest rate tools more actively to support the real economy and productivity improvements when conditions allow. In essence, he seeks not a repeat of pandemic-era massive stimulus, but a return to a framework emphasizing credibility, price stability, and monetary orthodoxy, moving away from the highly balance-sheet-dependent policy regime of the past decade. This explains his emphasis in hearings on reforming communication, overhauling the inflation framework, reducing forward guidance, and characterizing large asset holdings as more beneficial to "Wall Street" than "Main Street."
Currently, the front-end of the U.S. Treasury yield curve trades above the Fed's policy rate ceiling, suggesting increasing potential for steepening. However, global bond markets have stabilized recently after last month's sell-off driven by "stagflation" fears fueled by high oil prices due to Middle East conflicts. Elevated oil prices pose renewed inflation risks; if persistent, this could ultimately harm growth and potentially lead to the Fed's dreaded stagflation scenario. Wall Street strategists and fixed-income managers will closely monitor Chair Powell's post-meeting remarks this week for clues on how the Fed assesses the economic impact of geopolitical tensions.
Interest rate futures traders currently price in about 25 basis points of rate cuts by the December Fed meeting. Rate cuts typically depress front-end yields significantly, widening the gap with longer-term yields (10-year, 30-year) and thus steepening the curve. Robert Tipp, Global Head of Fixed Income and Chief Investment Strategist at PGIM Fixed Income, stated that Fed officials "will try to buy time because they see the U.S. economy is still quite strong, but inflation remains above target." He added, "They will want to avoid shocking the market and causing an unintended tightening of financial conditions, so they might keep policy on hold for an extended period." Tipp currently sees shorter-duration Treasuries as vulnerable, depending on how geopolitical conflicts transmit to economic data.
Investors will also focus on the core PCE price index, the Fed's preferred inflation gauge, due Thursday. Jack McIntyre, Portfolio Manager at Brandywine Global Investment Management, noted, "This week we unusually face headlines on Iran-U.S. ceasefire talks, crucial economic data, global central bank decisions including the Fed, and earnings from tech giants like Google and Microsoft. A surprise in any of these could stir markets." He added, "The bar is very high for the Fed to significantly shift market expectations through verbal guidance alone."
What would Warsh's leadership mean for the "global asset pricing anchor" and the AI-driven global stock market rally? The core implication for the Treasury market under Warsh is not simply "rate cuts are good for bonds," but a potential repricing of the policy reaction function: less forward guidance, emphasis on new inflation metrics, a smaller balance sheet, and a narrower policy focus. This would shift the market from relying on the Fed's pre-announced policy path back to "meeting-by-meeting repricing," likely increasing front-end rate volatility.
Reports indicate Warsh explicitly advocated during Senate hearings for coordinating with the Treasury to shrink the Fed's balance sheet, criticizing the routine use of balance sheet expansion. He argued that a smaller balance sheet could allow for lower rates, better inflation outcomes, and a stronger economy. If the Fed uses a smaller balance sheet to achieve some tightening, short-end yields might fall due to rate cut expectations. However, the long end would face upward pressure from three sources: reduced official demand for duration assets due to Fed balance sheet reduction, persistent fiscal deficit and Treasury supply pressures, and inflation risk premiums from oil shocks that are slow to dissipate.
Fed balance sheet reduction would undoubtedly dampen aggregate demand and push up long-term yields. However, economic consequences from geopolitical conflicts might prompt the U.S. government to introduce populist measures aiding households and businesses. Combined with potential Trump pressure on Warsh for rate cuts, short-end yields could be lower due to these combined forces. This dynamic underpins Wall Street's renewed bets on "yield curve steepening."
If the 10-year Treasury yield, the global benchmark, remains elevated or rises further driven by fiscal stimulus-induced term premiums, it would pressure valuations of high-yield corporate bonds, AI-related tech stocks fueling the global equity rally, and cryptocurrencies. For these core risk assets, higher long-term yields mean simultaneously higher funding costs, weaker liquidity expectations, and a higher discount rate.
Theoretically, the 10-year yield represents the risk-free rate (r) in the denominator of valuation models like DCF. If other factors, particularly cash flow expectations (the numerator), remain unchanged—such as during earnings seasons lacking positive catalysts—higher or persistently elevated discount rates can compress valuations for richly priced assets like AI-tech stocks, high-yield bonds, and cryptocurrencies.
However, given Warsh's focus on AI productivity gains and his intent to structurally reform the Fed, the global equity bull market is unlikely to end abruptly. Instead, it may transition from a liquidity-driven broad revaluation to a performance-driven divergence. During this shift, increased market volatility is probable as the global pricing anchor—the 10-year yield—rises amid a steepening curve. AI infrastructure companies with solid orders, cash flow, pricing power, and capital expenditure benefits, along with software giants with strong data assets and AI-integrated operations, may still thrive in a higher rate environment.
Warsh's criticism of the 2021-2022 inflation surge, his firm stance on rewriting the inflation framework, and his emphasis on AI productivity gains are aligned: he bets that future inflation control will rely on technological progress, productivity improvements, and a more restrained central bank balance sheet to rebuild monetary credibility, rather than further balance sheet expansion to support asset prices. Nonetheless, high-multiple stocks with low earnings, reliant on narrative expansion, would be more vulnerable to pressure from elevated 10-year yields and real rates. In other words, Warsh may not be the "terminator" of the AI bull narrative, but he could be a key macro variable shifting the AI rally from "indiscriminate euphoria" to a "high-rate screening contest." If the 10-year yield stays high due to rising term premiums or bond volatility increases, discounting future cash flows for AI-related tech stocks becomes harsher, particularly pressuring "AI-concept assets" whose valuations depend heavily on distant profit realization and lack proven free cash flow.
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