Fed Chair Warsh's hawkish stance drives sharp rise in Treasury yields
Since a hawkish speech at Jackson Hole, Treasury yields have surged, prompting significant losses in bond funds and raising concerns about broader financial impacts.
Thirty-year Treasury yields have risen to their highest level since 2002, with the 10-year yield reaching about 5.3% in September, marking the worst month for U.S. government bonds in four years. Analysts note that typical technical factors, such as a modest slowdown in the basis trade or a modest increase in the term premium, do not fully explain the magnitude of the move in the $40 trillion market.
The shift is attributed primarily to a change in Federal Reserve policy. On Aug. 28, Fed Chair Kevin Warsh delivered a speech at Jackson Hole that signaled a more aggressive stance. Apollo chief economist Torsten Sløk observed that the Fed moved from expecting rate cuts in 2026 to leaning toward further hikes. The market reaction intensified after a strong August CPI report on Sept. 11 and the Fed’s quarter-point rate increase on Sept. 16, during which Warsh emphasized “discipline,” “resolve,” and a commitment to “price stability.” The Fed’s dot plot now suggests additional hikes, with inflation projected above target through 2029.
Investors recalled the 2022-23 period when the Fed raised rates by 525 basis points over 17 months, a cycle that caused steep declines in bond indices and contributed to the collapse of Silicon Valley Bank. The memory of that episode appears to have heightened sensitivity to the current policy direction, leading to a rapid reallocation away from long-duration Treasury securities.
Since Jackson Hole, the iShares Aggregate Bond ETF has fallen about 4%, indicating market-wide losses exceeding $1 trillion. Model estimates suggest unrealized losses in the banking sector rose by $115 billion in September and $180 billion for the quarter, pushing total underwater securities to roughly $500 billion. Mortgage rates have climbed nearly 100 basis points, suppressing home sales and generating approximately $400 billion in losses for mortgage-backed securities.
While the Fed’s stance may bolster its credibility, the higher rates are increasing borrowing costs for consumers, homeowners, businesses, and banks, and are also affecting foreign economies through a stronger dollar.