By Martin Baccardax
The first order of business for a kid with a new babysitter is testing the limits of the new domestic boss with a series of brazenly absurd actions, most of which run counter to the shared objectives of peace, goodwill and a snack before bedtime.
Bond markets aren't children, of course, but their challenge to the new Federal Reserve Chairman, Kevin Warsh, who was sworn in last week, is causing something of a fuss. And he'll need to get hold of their nighttime raids into the pantry and incessant time spent on social media before it renders them unfit for purpose when their parents get home.
The recent divergence in 10-year Treasury note yields, the unofficial benchmark for global lending, and the performance of the S&P 500, unquestionably the deepest equity market in the world, suggests the kids might be winning.
Daily changes in the former, compared to the gains for the latter, over the past two months have created the steepest gap since 1999. Meanwhile, term premium, or the compensation bond investors demand to hold long-term government paper, has hit its highest level in 12 years, according to recent NY Fed estimates.
Both moves suggest the bond market is both balking at the idea that artificial intelligence is the cure to all economic ills and testing the authority of a new Fed Chair chosen by President Donald Trump to lower interest rates and keep the stock market booming until the end of his term in 2028.
Thus far, the results are mixed.
Stocks, of course, are on fire, having powered nearly 20% from their late March nadir to a series of record highs, paced by staggering tech gains, mountains of AI capex spending and historic surges in the chips and instruments that keep the whole tech complex humming.
Bets on a Fed rate cut, however, have virtually disappeared, and traders don't see the odds of a reduction until the summer of 2027, according to futures markets.
The U.S. war with Iran has stoked global oil prices, which in turn has boosted inflation prospects and hammered domestic bond markets.
Benchmark 10-year note yields have added more than 50 basis points since the start of the conflict, while longer-dated 30-year bonds have traded at the highest level, in terms of yield, since the day prior to the global financial crisis in 2007.
At the head of the bond curve, 2-year notes have been trading north of 4% since mid-May, the highest in a year and well north of the current Fed rate benchmark of 3.5% to 3.75%.
There is a mixed analysis of the recent moves.
Some suggest the bond market is testing the new Fed Chair's resolve by keeping yields elevated, perhaps in line with the massive expected increase in Trump administration borrowing.
Others, however, note that the current surge is more tied to basic inflation mechanics, and the surge in global crude prices over the first five months of the year, as opposed to the broader purpose of fiscal discipline.
The shift in yields, however, appears more permanent than first expected: 2-year notes remain firmly north of 4%, 10-year paper is trading close to 4.5% and 30-year bonds are changing hands above 5% despite the massive pullback in global crude prices.
Brent has fallen nearly 20% since the start of the month, and U.S.-focused WTI has tumbled more than 15% to trade south of $90 a barrel on Wednesday, amid hopes of a peace deal that will reopen the Strait of Hormuz and normalize global energy markets.
That's a tricky landscape for Warsh, who was sworn in as Fed Chair last week, to navigate as the central bank seeks to tame inflation pressures without slowing broader economic growth.
But it's also important for stocks, which are entering a period of heightened uncertainty now that first-quarter earnings are nearly complete, the chip stock rally is nearing eye-watering levels and the consumer is starting to wilt under the pressure of higher energy prices and a stagnant labor market.
"The direction of the market's travel from here could hinge on whether rates stabilize and incoming data confirms that growth can hold without reigniting inflation," said Anthony Saglimbene, chief market strategist at Ameriprise.
The market's new babysitter has his challenge. The kids in the bond market are testing his patience. And the parents of the stock market are heading home soon.
Write to Martin Baccardax at martin.baccardax@barrons.com
This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
May 27, 2026 11:39 ET (15:39 GMT)
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