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Bond owners want to be sure that the value of their coupons (and principal) will not be eaten away by inflation. Nominal bond yields contain both an inflation component and a real, non-inflationary component that includes the risk and opportunity loss of tying up money over time.

The Federal Reserve controls the overnight fed funds rate. They have manipulated long-term bond yields during emergencies using fiat money (Quantitative Easing) that is similar to past empires which debased their precious metal coins with base metals.

While the Fed has gradually allowed some of these long-term bonds to roll off, they started a little QE early this year. They also pay banks the overnight interest (3.5%) which pumps money into the system.

The real yield of the 10 year Treasury has risen recently but it’s still low on a historical basis.

10-Year Real Interest Rate

The markets crave lower interest rates because they are highly leveraged.

Fed Chair Kevin Warsh just gave his first speech at the Kansas City Fed’s annual symposium in Wyoming.


Board of Governors of the Federal Reserve System
Keynote remarks by Chairman Warsh at the 2026 Jackson Hole Economic Policy...

Thank you. It's great to be here again and to see so many familiar faces. I've been looking forward to this weekend—what better place to mark my 100th day...

...[big snip]...
I have set out to change the form and function of the Fed Chairman’s so-called forward guidance. You might know about my long-time discomfort with early pronouncements of future policy decisions. I much prefer another path . . . and will make the case for it.

Transparency in communications about future policy decisions is not a virtue unto itself. Communications must be in service to the Fed’s paramount responsibility: getting monetary policy right...

Third, there should be no misunderstanding: The Fed’s price-stability objective of 2 percent, as measured by the personal consumption expenditures (PCE) price index, is a firm, fixed target. Let’s be equally clear about another aspect of the objective: Price stability is not self-executing, nor is inflation necessarily mean-reverting. It is the Fed’s job to deliver stable prices.

Fourth, the Fed also bears responsibility for maximum employment. Achieving both sides of our mandate over the medium term is not an either/or proposition. I do not believe that the Fed’s dual mandate works at cross-purposes. After all, high inflation itself is very harmful to economic prosperity.

Fifth, short-term interest rates are the predominant tool to achieve the dual mandate. Unconventional policies to spur economic activity may suit genuine crises but should otherwise be used sparingly, if at all...

I believe the labor markets are consistent with full employment.

But on the price-stability side of our mandate, the numbers are more concerning. The Fed’s preferred measure of inflation, the 12-month change in the PCE price index, stands at 3.7 percent, while the six-month change is 4.1 percent. The comparable measures from the consumer price index (CPI) are also elevated, as are the core measures of both PCE and CPI inflation. None of these measures are perfect, but they all tell a similar story: Inflation is running above our 2 percent target. So the Fed’s predominant focus right now should be on prices...

Of goods and services in the PCE basket, 49 percent showed annualized price increases above 3 percent. Again, this is well below the post-pandemic highs but still quite elevated...

The good news is that measures of inflation expectations in the medium term, by and large, look stable. And inflation compensation measures from the swaps market send a strong and similar message...

The responsibility for 65 months of sustained, elevated inflation sits squarely with the central bank. And that is where it belongs.

Here is my standard: We must be confident that underlying inflation is moving to our objective, clearly and at sufficient speed. Otherwise, we have work to do. That’s our job . . . our mandate . . . and our charge to keep... [end quote]

There are some action items here. They point to a higher fed funds rate, less information to investors/ speculators and a Fed that is not likely to rescue the markets without a genuine emergency. Will the Fed cut the fed funds rate if the market drops or has a “taper tantrum” or if President Trump puts pressure on Warsh? Or will Warsh stand by his guns?

Separately, Warsh said that he intends to monkey around with the CPI calculations that undergird the TIPS yields. Everyone has seen this game before (with so-called “hedonic adjustments” during the Clinton administration) so bond traders are building additional risk into long-term TIPS as well as nominal bond yields.

This is very concerning to the Treasury, which is responsible for paying the interest on the federal debt. Treasury Secretary Scott Bessent can’t create money like the Fed, but he used short-term Treasurys to buy long-term Treasurys in order to suppress the long-term yield.

nytimes.com - Ezra klein podcast robin wigglesworth

Bessent seems to be trying to use some weird tools for purposes they weren’t really designed for.

Jacking up the buyback program by a few billion dollars, even times 10, is not going to move the needle, which is why people are scratching their heads over why he would do this and why, frankly, after the initial reaction, Treasury yields have started climbing again...

Treasury Secretary Scott Bessent has a “3-3-3” plan, as he’s dubbed it. He wants to lower the budget deficit to 3 percent of gross domestic product. He wants to get 3 percent economic growth, and he wants to increase oil production in the United States by three million barrels a day... [end quote]

Well, that’s going to be quite a stretch.

I’m sure that Warsh and Bessent talk to each other. Hopefully they will work cooperatively and not at cross-purposes.

It’s important to realize that interest rates impact every asset market as well as the overall economy. Following current trends, there’s no indication that interest rates are going down anytime soon. They may rise well past the ability of the Fed or Treasury to suppress them since the bond vigilantes are not liking what they hear.

Wendy