Warsh's Jackson Hole Speech: Markets Expect Steeper Yield Curve

The upcoming Jackson Hole Symposium is expected to be closely watched by markets for any sign that Fed Chair Kevin Warsh has changed his approach to monetary policy. While some expect a shift, Michael Kramer of Mott Capital Management believes Warsh will maintain the status quo.

Kramer notes that the term premium, which represents the additional yield investors require to hold longer-term Treasury securities, remains low at 82 basis points. This is well below the historical average of around 150 basis points before Quantitative Easing (QE).

A return to the pre-QE level of the term premium would push the 10-year bond yield above 5%, assuming a neutral interest rate in the mid-4s. Kramer also expects higher implied volatility in the bond market, which would lead to higher rate volatility and tighter financial conditions.

Global rates are rising, with Japan leading the way. The BOJ's decision to normalize policy and raise rates is seen as a crucial factor in the global rate hike cycle. September TONAR futures are pricing in a rate of 1.19% for September, 1.41% for December, and 1.6% for March.