By Gertrude Chavez-Dreyfuss and Fergal Smith
NEW YORK/TORONTO, Aug 26 (Reuters) – Investors this week will watch the annual Jackson Hole symposium for clues on how policymakers plan to navigate a landscape in which higher Treasury yields could do some of the tightening work for them.
The central bank has often used the Wyoming gathering, hosted by the U.S. Federal Reserve Bank of Kansas City, to flag its expectations for rate policy, but few investors expect President Trump’s new Chair Kevin Warsh to honor that tradition in his debut speech on Friday. He has abandoned the forward guidance investors were long accustomed to, contending traders and portfolio managers should scrutinize market signals instead.
That has left the market in the dark. Investors say Warsh has also sown market confusion and stoked doubts about his credibility on inflation in part by hinting at last month’s policy meeting that rising yields, by tightening monetary conditions, could reduce pressure on the Fed to hike rates even as rising prices remain well above its 2% target.
They hope the Fed chair will use his speech to fully explain his roadmap for returning inflation to the Fed’s target and what he sees as the bond market’s role in that strategy.
“This lack of direction can be frustrating,” said Robert Gill, a portfolio manager at Fairbank Investment Management in Toronto. “It is causing uncertainty and contributing to higher long-term bond yields, and this is an outcome that he seems to be designing.”
The picture has been complicated further by the Treasury Department’s interventionist pivot after this month’s selloff in long-dated Treasury bonds — fueled in part by fears over swelling sovereign debt and an expected rise in issuance — drove yields to near two-decade highs.
In a surprise move, the Treasury subsequently doubled buybacks on long-dated bonds, an operation Secretary Scott Bessent said aimed to support liquidity but which investors widely saw as an effort to tamp down yields. The relief was short-lived.
While investors do not expect Warsh to comment directly on the Treasury’s debt management policy, the combination of its increased buybacks and elevated term premia, the extra compensation investors demand for holding long-term bonds, highlights a growing challenge for the Fed which investors hope he will address.
In particular, they want Warsh to more strongly commit to the 2% inflation target as measured by the annual change in the price index for personal consumption expenditures, and to clearly explain how the Fed plans to respond if inflation continues to run above target.
“Are they going to give it a year, or are you going to try to get it in compliance in six months?” said Vishal Khanduja, head of the Broad Markets Fixed Income team at Morgan Stanley Investment Management in Boston.
Underscoring that uncertainty, the market is pricing in a growing chance of a hike, despite falling payrolls and slowing price rises suggesting the economy is in no immediate danger of overheating. U.S. rate futures are pricing in a 40% chance of a rate hike next month, up from 33% a week ago, according to the CME’s FedWatch.
“It makes little sense to keep markets in the dark,” said Royce Mendes, head of macro strategy at Desjardins in Toronto.
BOND MARKET TIGHTENING
Some investors share Warsh’s stance on the bond market.
George Catrambone, head of fixed income Americas at DWS in New York, argued that the bond market has already tightened financial conditions substantially, reducing the need for policymakers to do so through rate increases.
Since Warsh took the helm in May, the benchmark U.S. 10-year yield has climbed 8 basis points, while the 30-year bond yield has advanced 10 basis points.
Yet long-term yields are being driven not only by inflation fears and related expectations for policy rates, but also by Treasury supply dynamics and investor demand. Bessent has said that the Treasury is increasingly having to compete, for example, with a large volume of corporate issuance at higher yields, including for artificial intelligence infrastructure.
The Treasury’s buyback plan is unlikely to eliminate the upward pressure on long-end yields if investors continue demanding greater compensation to hold longer-dated debt, investors said. But increasing the Fed’s credibility on inflation could help.
“There is this very careful dance between investors and Fed,” said Jeff Klingelhofer, co-chief investment officer at Aristotle Capital in Newport Beach, California. “But ultimately, the Fed will have to act, or say something.”
(Editing by Michelle Price, Colin Barr and Nick Zieminski)
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