Warsh's Jackson Hole Speech Set to Spark Bond Yield Hike Fears

The upcoming Jackson Hole conference is expected to be closely watched by markets as Fed Chair Kevin Warsh delivers his first speech since taking over. While some may expect a change in tone, many believe Warsh's views remain unchanged.

One key aspect of the market that will likely receive attention is the bond yield curve. The term premium has risen, indicating that investors are seeking greater compensation to hold US debt. At 82 bps, the 10-year term premium remains low by historical standards, averaging around 150 bps in the decades before quantitative easing.

This could lead to a significant increase in the 10-year yield, potentially pushing it above 5%. Additionally, the removal of forward guidance from the Fed would likely result in higher implied volatility in the bond market. The current low volatility is due to investor confidence in knowing the Fed's next moves.

Warsh's plan may be to allow the long end to rise and tighten financial conditions through higher mortgage rates, corporate borrowing costs, and equity multiples. This approach would differ from previous Chairman Powell's method of using the funds rate to achieve monetary policy goals.

Global rates are also rising, with Japan leading the way. The BOJ's inflation expectations have returned to 2%, making it difficult for rates to fall anywhere in the world.