Bond Yields Soar as Market Questions Fed Credibility

The Federal Reserve's decision to keep interest rates unchanged has sent bond yields soaring to a 19-year high, raising concerns about Fed Chairman Kevin Warsh's credibility in fighting inflation.

On Wednesday, investors dumped 30-year Treasury bonds, sending the yield shooting up by as much as 14 basis points to nearly 5.23%. Market measures of inflation expectations rose, and even stocks tumbled as investors wagered that Warsh was only delaying an inevitable rate hike.

Bondholders pushed down yields on short-term Treasuries but demanded higher payouts on longer-term bonds to compensate for inflation risks in the years ahead. This steepening of the yield curve indicates a lack of confidence in Warsh's policy strategy, according to Ben Emons, managing director of fixed income at Highline Asset Management.

The sharp jump in longer-term yields suggests that investors are increasingly concerned about the Fed's ability to rein in inflation, which has been above the target rate for five straight years. While Warsh emphasized his commitment to bringing inflation back to 2%, market expectations suggest otherwise.