Warsh Set to Cement Steepening Yield Curve Strategy at Jackson Hole

Kevin Warsh's speech at the Jackson Hole Symposium is expected to be closely watched by markets for any sign of change in his stance on ending Fed forward guidance. However, it appears likely that his message will remain unchanged.

Warsh has hinted that a market free from Fed hand-holding and allowing the yield curve to steepen is beneficial. This could lead to higher bond yields as investors demand greater compensation for holding US debt, with the 10-year term premium already showing signs of rising.

The term premium remains low at 82 bps, but historically it has averaged around 150 bps in the decades before QE. A return to this level, combined with a neutral rate of around 4%, could push the 10-year bond yield above 5%.

Furthermore, a decrease in Fed forward guidance is expected to increase implied volatility in the bond market, as investors become more uncertain about future Fed actions.