Warsh's Hawkish Jackson Hole Speech Sparks Market Volatility

Kevin Warsh's first Jackson Hole address as Chairman of the Federal Reserve sent shockwaves through markets, with investors caught off guard by his hawkish message. In a speech that emphasized an inflation-forward case, yields on two-year US treasuries jumped 11 basis points to 35% to 58%, and the implied probability of a September interest rate hike increased accordingly.

Warsh's comments were met with a reaction function that saw investors flocking to gold and US treasuries, rather than strengthening the US dollar. This was partly due to the recent announcement by the Bessent Treasury to double long-term treasury buybacks on August 31st.

The implications of Warsh's speech for sovereign debt were less discussed, but some analysts are warning that the market setup could be disrupted by renewed geopolitical risk in the Middle East. The US has launched attacks on Larka Island, leading to concerns about a potential escalation in the region and its impact on global markets.