Bond Market Calls Fed Chief's Bluff on Interest Rates

The Dow Jones Industrial Average plummeted over 1,100 points on July 29 after the Federal Reserve decided to keep interest rates steady at its latest meeting. The decision was made by Fed Chair Kevin Warsh and his colleagues, who voted in favor of leaving the federal funds target rate unchanged at 3.5%-3.75%. However, despite this decision, the bond market is calling Warsh's bluff on interest rates.

Warsh has emphasized the importance of price stability and better data clarity, but the reaction in the bond market suggests that traders are not convinced that the central bank will stand pat while interest rates remain elevated. The long end of the Treasury yield curve, which depicts the relationship between bond yields and the time to maturity of those bonds, has shifted significantly since Warsh became Fed chair.

The 30-year Treasury yield soared above 5.2% to its highest level in roughly 19 years, while the 10-year Treasury yield surged to around 4.7%. According to Warsh's prepared remarks to the press, 'the first [economic development] is a very notable change since our last meeting 42 days ago: nominal and real yields are materially higher across the Treasury curve.'

This steady rise in long-dated bond yields indicates that the bond market expects the historically hawkish head of the central bank and his colleagues to raise interest rates in the presumed not-too-distant future.