Bond Market Loses Faith in Fed's Ability to Tame Inflation

The bond market has lost some respect in the eyes of Federal Reserve boss Kevin Warsh. The yield on long-term treasuries recently crept through a multi-year trading range and pushed up near 5.25%, a level not seen since 2007.

This increase is having a ripple effect, with rates on 30-year fixed mortgages sitting at about 6.6% in the U.S., their highest since August 2025, according to recent Freddie Mac data. Higher yields are also tightening financial conditions and constraining growth in auto loans, personal borrowing, and corporate lending.

The Federal Open Market Committee (FOMC) voted 9-3 in favor of leaving the Fed funds rate unchanged at 3.5% to 3.75%, a decision that perplexed many. The new FOMC chair made it clear that price stability is the metric by which his success or failure will be measured, but has also indicated that inflation at 2% is the target.

However, prices are running hotter than that goal, and the Fed failed to take action to combat their advance. Short-term rates fell after the latest rate decision, while long-term rates moved higher, indicating some market participants aren't convinced of the tough talk about stable prices.