Long-Term Treasury Selloff Hinges on Warsh’s Jackson Hole Message

A surge in long-term US Treasury yields has put Federal Reserve Chair Kevin Warsh’s Jackson Hole speech at the center of the bond market outlook.

Bloomberg reported on Aug. 23 that the 30-year Treasury yield recently climbed as high as its highest level since 2007. Selling has centered on long-dated bonds as inflation remains above the Fed’s 2% target and fiscal concerns mount, with US national debt exceeding $40 trillion.

Yields briefly fell after the Treasury Department said it would at least double the size of its long-term bond buybacks, or early repurchases, but the relief did not last. With the inflation and fiscal worries driving long-term yields higher still unresolved, investors are now focused on Warsh’s message at the Jackson Hole Economic Policy Symposium on Aug. 28.

Markets are watching for how Warsh will respond to persistent inflation and how clearly he will spell out the future path of monetary policy. Since taking office in May, Warsh has offered few concrete signals on the policy outlook. At the press conference following the latest Federal Open Market Committee meeting, he also failed to clearly outline the policy path, prompting a sharp acceleration in Treasury selling.

“If he repeats a message similar to the last one, the market will see that as disappointing,” Molly Brooks, a US rates strategist at TD Securities, said. The recent selloff in long-dated Treasuries could deepen further, she added.

HSBC rates strategist Diraj Narula said clearer guidance from Warsh on his view of underlying inflation pressures alone could help reduce the term premium fueled by policy uncertainty.

Another key variable before Jackson Hole is the US personal consumption expenditures price index for July, due on Aug. 26. Over the past month, inflation, employment and retail sales data have met or come in below market expectations, leading investors to scale back bets on a near-term additional rate increase.