The Fed is Late, and the Bond Market Knows It

Kevin Warsh used his first Jackson Hole address as Fed Chairman to mark his 100th day in office with a message investors had been waiting on since his muddled July press conference: inflation remains the priority, and the central bank has work to do. He avoided committing to forward guidance or a reaction function, holding to the hands-off approach he has favored since taking over from Jerome Powell in May. What he did offer was a clearer read on the economy than markets had gotten from him before, along with a warning that this summer’s softer inflation prints do not represent meaningful progress.

Treasury yields responded in kind. The 2-year note jumped roughly 8 to 12 basis points to the mid-4.30% range, its sharpest post-Jackson Hole move in years. The 10-year rose a relatively small few basis points into the high 4.7% range. Odds of a September hike on surged from about a third to more than half within the session.

Where the “priced in” argument comes in is the direction of travel rather than the size of any single day’s move. Bond traders have been staring at elevated inflation, a widening deficit, and now a war with Iran for months. Warsh’s speech gave the market a clearer signal on Fed intent, but it did not introduce a new inflation problem. The problem was already sitting in the data and in oil prices before he opened his mouth. That is the sense in which the hawkish turn was expected. It’s not that yields wouldn’t move, but that the underlying pressure pushing them higher predates anything the Fed says or does.

This is the core of the argument for why a rate hike will not be the primary driver of where yields go from here. Core inflation running hot, a widening deficit, and geopolitical risk are already doing the tightening work that the Fed has been reluctant to do on its own. The Fed raising rates would formalize a repricing, but I can’t see yields having significant jumps. Warsh is catching up to the bond market rather than guiding it.

The clearest evidence for that came days after Jackson Hole, when the US struck targets inside Iran. The 10-year yield pushed to its highest level since January 2025, and the 2-year moved even faster, both driven by oil prices spiking and traders pricing in inflation risk rather than seeking safety in Treasurys. That reaction broke the usual playbook, where military escalation sends investors into government debt as a safe-haven. Instead, yields rose on the strikes the same way they would on a hot CPI print.

That move also undid weeks of effort from the Treasury to keep long-end yields contained. Secretary Bessent’s intervention, including a buyback program aimed at supporting demand for longer-dated debt, had helped calm a selloff that pushed 30-year yields to their highest levels since 2007. The Iran strikes erased that work in a single session. It is a useful illustration of the limits of what Treasury operations can do against a fundamental repricing of inflation and geopolitical risk. The Treasury can manage the supply and timing of issuance, and it can lean on buybacks to support specific parts of the curve, but it cannot manufacture demand for duration when the macro backdrop is telling investors the opposite.

The deficit side of this is a separate problem with its own dynamics, and I have covered that ground in a prior post. What matters here is the combined effect on the cost of capital. As yields stay higher, borrowing gets more expensive for everyone downstream of the Treasury curve. Mortgage rates, auto loans, and credit card rates all take their cue from where the 10-year sits, and none of those costs are coming down.

The same logic applies to the AI buildout, which has been financed in large part by debt and hyperscaler balance sheets willing to absorb massive capex. That math gets harder as the risk-free rate stays elevated and the cost of debt financing for data centers and infrastructure climbs with it. A Fed hike would not break the spending cycle, but it would make companies have to live with even higher interest.

Disclaimer:

This blog post is for educational and informational purposes only. It is not financial advice. I am not a licensed financial advisor, and nothing in this post should be interpreted as a recommendation to buy or sell any securities. Trading involves risk, and results are not guaranteed. Past performance is not indicative of future results. Always do your own research and consult with a licensed financial professional before making any investment decisions. None of my statements or points of view are necessarily reflective of the views of Deep Knowledge Investing.