Warsh's Communication Clampdown Sparks Market Mayhem

Kevin Warsh's decision to strip back communication at the Federal Reserve has already had unintended consequences, investors warn. The move is eroding the central bank's influence over the US$31-trillion U.S. Treasury market.

The Treasury yield curve steepened sharply after Wednesday's announcement, with 30-year yields rising as high as 5.24% and two-year yields falling to 4.27%. This represents a significant shift in investor expectations, with traders demanding more to lend to the U.S. government over the longer term due to fears of rising inflation.

Stephen Jones, chief investment officer at Aegon Asset Management, described Warsh's approach as 'already backfiring.' Francesco Pesole, a strategist at ING, added that the steepening in the Treasury curve after Wednesday's press conference 'looked very much like a loss-of-confidence trade.'

The gap between 30-year and two-year U.S. Treasuries jumped from about 0.8 percentage points to 0.97 percentage points, its sharpest move in almost a year.