Long bonds risk deeper selloff without clear Warsh guidance

Bond investors will zero in on Kevin Warsh’s Jackson Hole speech this week, with a further selloff in long-dated Treasuries at stake as markets look for clues on the Federal Reserve chairman’s response to persistent inflation and fiscal concerns.

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Long-term US bonds have come under pressure in recent weeks, with traders pushing the yield on 30-year bonds to the highest level since 2007 at one point. The Treasury Department responded by announcing plans to at least double the size of buybacks of longer-dated securities, providing only temporary relief from the selloff.  

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The whipsaw in rates adds to the importance of Warsh’s speech at the Jackson Hole Economic Policy Symposium on Friday. Traders will be looking for signals on the Fed’s reaction function, particularly how policymakers plan to respond to inflation that has been stubbornly above the central bank’s 2% target and a weakening fiscal picture, with the national debt topping $40 trillion. 

Warsh himself has provided little forward guidance since taking the post in May. His appearance after the last policy meeting sparked a massive selloff, underscoring the market sensitivity surrounding Friday’s remarks.

“More of the same, I think, would be seen as a disappointment to the markets, which could exacerbate the long-end selloff that we have seen,” said Molly Brooks, US rates strategist at TD Securities. 

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The forces that have weighed on the market remain in place, including fiscal concerns, inflation and uncertainty over how the Fed will respond, said Kathy Bostjancic, chief economist at Nationwide Mutual Insurance Company. 

“The fundamental reasons that long-term rates went up are still there,” she said.

That provides Warsh an opportunity to calm investors by clarifying his outlook, said Dhiraj Narula, an interest-rate strategist at HSBC.

“Some characterization of how Chairman Warsh sees underlying inflation pressures could, in our view, already provide some justification for lower uncertainty-related term premium,” Narula said. 

In the run-up to Jackson Hole, investors will get a fresh look at price pressures with the release of the personal consumption expenditures index for July on Wednesday. In the past month, releases on inflation, jobs and retail sales fell within or below market expectations, pushing traders to pare back expectations of rate hikes in the near term.