The implied chance of a hike at the Federal Reserve's Sept. 16 meeting has fallen from nearly 100% in late July to roughly one-third. Over the same stretch, the 30-year Treasury yield (^TYX) has climbed from about 5.09% to 5.31%, its highest level since 2007. At first glance, those moves look backward.
If investors expect less tightening from the Fed, longer-term borrowing costs might be expected to ease as well. That puts Fed Chairman Kevin Warsh back in an increasingly familiar spot, caught between what the central bank is doing and what financial markets appear to want. Markets have already flipped the script on Warsh by dramatically loosening financial conditions since his July meeting, even with long-term rates elevated.
Read more: How soaring Treasury yields could impact your finances And Warsh has left September open. The Financial Times reported earlier this month, citing people familiar with his thinking, that he could consider a hike if inflation came in hot and markets moved toward expecting higher borrowing costs. Instead, the odds of a September hike have fallen.
Long-term rates have not followed. That is the puzzle Jim Bianco of Bianco Research has been pressing. "For those who want to be bullish on bonds, do you really want the Fed to NOT hike rates in September?" Bianco wrote last week.
His argument goes well beyond the latest move. The Fed began cutting rates on Sept. 18, 2024, and has lowered its benchmark rate by 1.75 percentage points since then. Yet the 10-year Treasury yield is roughly 1 percentage point higher, while the 30-year has risen about 1.3 percentage points.
That is the same dynamic behind the bond vigilantes doing the Fed's dirty work. The Fed controls a crucial short-term interest rate, but investors ultimately decide what they require to lend money for decades. By Bianco's count, only the 1980 cutting cycle saw the 10-year rise anything like this much.
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