Warsh's Jackson Hole Speech Stirs Bond Market Fears

Kevin Warsh's speech at the annual Jackson Hole Symposium has put bond yields on notice. As Fed Chair, Warsh is expected to give his first address, and markets are eagerly awaiting any indication that he has changed his stance on ending the Fed's habit of providing forward guidance to markets.

Warsh is unlikely to deviate from his previous views, as evidenced by current market conditions. The 10-year term premium is already rising, which is the bond market's way of requesting greater compensation for holding US debt. At a mere 82 bps, this remains very low compared to historical standards, averaging around 150 bps in the decades before quantitative easing.

A return to that level alone would push the 10-year above 5%, making a Fed that provides less forward guidance a likely scenario for higher implied volatility in the bond market. This is because markets are still confident about knowing the Fed's next moves, resulting in low rate volatility despite recent rises in long-end rates.

The funds rate itself does little to tighten financial conditions; instead, it is the long end that matters, higher 10-year yields feed through to mortgage rates, corporate borrowing costs, and equity multiples. Higher rate volatility also feeds through to credit spreads, making this a crucial channel for Powell's plan to let the long end rise.