Fed Credibility on Thin Ice as Long-Term Treasuries Plummet

Fed Chairman Kevin Warsh's communication strategy was put to the test after the central bank left its key policy rate unchanged, triggering a sharp sell-off in long-term Treasuries.

The 30-year yield surged past 5.20%, its highest close since 2007, while the 2s10s yield curve steepened dramatically by 14 basis points as bond investors questioned the Fed's inflation defense.

Bond investors are challenging the Fed's credibility, not just near-term policy, and markets are demanding greater compensation for inflation uncertainty, Treasury issuance, and reduced confidence in the Federal Reserve's communication strategy.