Bond Investors Wary After Warsh Speech Fuels Rate-Hike Bets
Bond investors at firms including ABN AMRO Investment Solutions and Brandywine Global Investment Management are voicing skepticism about mounting speculation that Federal Reserve Chairman Kevin Warsh is poised to raise interest rates.
After Warsh reiterated his commitment to bringing down inflation in a highly anticipated speech on Friday, swaps traders see a rate hike as more likely than not at the central bank’s next decision in mid-September. While much hinges on employment data this week and inflation figures to follow, yields on policy-sensitive two-year Treasuries were down two basis points to 4.32% early on Monday, after surging the most in more than two months on Friday.
See more: Chairman Warsh’s Jackson Hole Speech Emphasizes Price Stability
Investors in parts of the market have their doubts after the chairman’s appearances jolted markets over the last few months, even as he’s consistently vowed to tamp down inflation. That has them bracing for the risk he keeps rates steady again, as he did in June and July, adding to Fed credibility worries that have helped drive long-maturity yields to the highest levels in about two decades. TD Securities on Friday said its base case is for the Fed to stay on hold.
For Christophe Boucher at ABN AMRO, Warsh’s comments weren’t enough to convince him that officials will follow through. He’s steering clear of the long-dated bonds that are vulnerable to concerns the Fed isn’t on top of inflation pressures.
“The reaction function is still unclear,” said Boucher, the firm’s chief investment officer. “In case Warsh does not support a hike in September this time, and if inflation remains sticky until then, credibility concerns may indeed re-emerge.”
Since Warsh took over in May, investors have struggled to adapt to his communications style, where he provides less forward guidance on interest-rate policy than his predecessors. On Friday, ING said in a research note that Warsh “was keen not to provide forward guidance, but his words smacked of forward guidance.”
At his first press conference as chairman in June, his commitment to bring inflation back down to the Fed’s 2% target reassured investors who were worried he’d fulfill President Donald Trump’s desire for rate cuts. Two-year yields shot higher, flattening the yield curve.
In July, he triggered the opposite reaction, with the curve steepening the most since August 2025. Long-dated yields climbed as investors said he had failed to articulate a rationale for the committee’s decision to keep rates unchanged.
Volatility isn’t uncommon as markets get accustomed to a new Fed Chair’s communication style, according to Daniel Siluk, head of global short duration and liquidity at Janus Henderson, who credited Warsh’s Jackson Hole performance with helping stabilize long-term Treasury yields.
“We are still a little wary of duration out the back end of curve. We prefer to own duration in the front end,” Siluk said in an interview Monday. “Some of the broader market and economic drivers that have led to the steepening of the yield curve and the back-end selling off still exist.”
‘Talk Is Talk’
Last week, Warsh told the bond market what it wanted to hear, said Tracy Chen, a portfolio manager at Brandywine.
“But talk is talk,” she said. “Action speaks louder.”
She’s sticking to an underweight stance on long-dated Treasuries, although she reduced that position after the Treasury Department said this month that it would “at least double” its planned purchases of outstanding 10- to 30-year debt.
Of course, the economic figures ahead are pivotal, in particular Friday’s monthly employment report after data last week showed US job growth was more moderate in the year through March than previously reported. Still, Warsh said the US was “doing well” on employment and that he was more concerned about the price-stability side of the central bank’s mandate.
On that front, softer-than-expected inflation reports released since the Fed’s July decision have vindicated the move to hold rates steady. Warsh said Friday that while recent inflation figures have been better, they don’t yet point to a meaningful trend.
Fed’s Job
“There is a risk the market continues to do the Fed’s job, overprices hikes and the Fed doesn’t deliver, as the data comes in muted,” said George Catrambone, head of fixed income at DWS Americas. “It’s less about the fact we’ve been above the 2% target and more about what direction the economy is headed.”
As he sees it, recent reports such as retail sales and employment aren’t signaling a reacceleration in the economy. Treasuries look “fairly attractive,” he said.
Amid questions around the economic outlook and without the forward guidance of Warsh’s predecessors, swaps traders are stepping up their hedging for next month, pricing in a roughly 60% chance of a hike.
“Without clearly benign inflation news, follow-through will be essential,” said Goldman Sachs Group Inc. researchers including George Cole. “If September is seen as a close call and the Fed holds again without clear explanation as to why, there would be meaningful risk of a July FOMC re-run for the curve.”
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