Will Warsh make a useful pronouncement at Jackson Hole?
With PCE inflation due this week and Warsh set to say absolutely nothing specific in a very high profile venue, the focus will be more the inflation story and framing how the consumer income vs. expenditure lines are shaping up. We also get updated 2Q26 GDP numbers for some other key data points.
There has been a lot of focus on the Bessent liability management program to push down yields (or limit increases) in the long-dated UST market. The market saw through his version of Operation Twist after one trading day. Now he is jawboning Plan B using the Treasury General Account as a potential funding source. 10Y UST is still hovering around 4.70% and 30Y UST around 5.23%.
In what we call a clash of the “revenue minus expenses school” vs. the “three card monte school” of liability management, the reality of recurring, massive deficits and incremental national debt levels needed to fund such shortfalls will keep US debt % GDP going the wrong way and the US interest expense line rising given the sheer scale of the incremental borrowing needs (even if just on the short end).
We will be curious to hear what seasoned sovereign debt analysts might say about a sovereign borrower that has chosen to drain some of its treasury to dress up quoted long rates (the coupon on the outstanding bonds do not change) without tackling the net rising debt problem. Revenue and expenses rule the shortfall and borrowing needs. The UST historically “got a pass” on traditional leverage metrics since the UST is “default risk free.” That has more of a cloud over it these days. We would feel better if Trump was not on record over the years saying it is OK for the US to default (remember “do a default” in one of the earlier shutdowns?).
The above UST deltas cover last week’s mild UST action as Bessent doing the twist did not impress the dance judges (aka the treasury market). That said, the 30Y on the long end did hold in better than the 10Y.
As we go to print on Monday, the 2Y and 5Y are essentially flat, the 10Y is down -3 bps at 4.7% and 30Y is down -4 bps at 5.23%.
The YTD deltas are still telling the same story with a bear flattener from 2Y to 10Y/30Y. That has sent 4 of the 7 bond ETFs into negative return range with the longer duration and/or higher quality benchmarks being on the losing end (see Market Commentary Asset Returns 8-23-26).
The post-Iran UST deltas are updated above, and there is little question around what drove these moves on inflation and an even worse profile for borrowing needs and UST supply. Iran was a mistake on multiple fronts both geopolitical and economic.
This is the “woulda, coulda” UST deltas that show how the UST curve deltas were positioned ahead of the Feb 28 bombing that took the US back to a fresh Mideast war.
The chart above and those that follow are for memory lane purposes. This chart will be part of the regular updates since it tells a story of historical context and the migration from 2020 across the tightening cycle to the Oct 2023 peak rate on the 10Y then back across the easing cycle in 2024-2025 through current times.
The UST history can be framed against today’s curve and other notable credit market timelines during the economic and monetary cycles of bygone years. The charts are essentially “roll-forward” replay charts to offer context on absolute yields and UST curve shape.
The move from 12-31-20 and ZIRP across the inflation and tightening cycle is clear enough in the move from 12-31-20 to 3-1-22 just ahead of the mid-March 2022 start of the tightening cycle and end of ZIRP. The long end is driven by the market, and that vote is obvious.
We like to highlight 9-16-24 UST curve to timestamp what was unfolding immediately before the easing cycle kicked into gear in Sept 2024 through Dec 2024 (see Footnotes & Flashbacks: State of Yields 12-29-24 ). That was around 7 weeks before Trump won the election to take his role in Jan 2025 in a peaceful, uncontested transfer of power (i.e., light on violence and Capitol sackings).
As noted in the above chart, the bear steepening on the long end was a force during 2024, and it has been hard to resist across time into 2026 with the economy steady and inflation back on the rise from the end of Dec 2024. The 10Y and 30Y UST deltas have not been moving in the right direction even though mortgages are not back to fall 2023 levels. The 30Y mortgage rates as of today are just under 6.8% (6.78%) using the Mortgage News Daily survey.
The above chart updates the 30Y UST vs. the dollar index (DXY). That is getting back into focus again as the UST supply pressures and other worldly deficits are felt. Combined with new milestones in national debt levels (the $40 trillion and climbing reality), those headlines are tough to counter.
The US Treasury General Account can only buy so many long bonds, and the tendency of Trump to alienate the existing base of international investors makes the currency issue an important variable. That will be back in focus near term as the US and Canada have a trade war, the Mideast is in chaos, and the EU sorts out how much they hate the US (or which country hates us the most).
The rule of thumb is that higher yields and economic growth bring a stronger dollar, but higher rates from inflation and UST supply-demand imbalances are a separate story. With Warsh heavily biased toward easing (if truth serum was administered) and Bessent looking to stabilize long rates, the recurring issue of record debt and steady dramatic budget deficits are hard to shake. The deficits mean more borrowing, and the wildcard of oil haunts the long end and also the inflation targets for the FOMC actions.
The above chart is one we include as a memory jogger on the troubled journey from COVID and ZIRP across the tightening and easing cycles. We detail the easing and tightening actions across time in the boxes.
We see the shift after March 2022 to year end 2022 on the tightening and inflation pressures. That was clearly a major move. This timeline cuts across the easing in 2024 and 2025.
The FOMC oddsmakers (CME FedWatch) are calling for fed funds tightening by year end (Dec 2026 FOMC meeting). The odds of unchanged are 25.7% as of today (8-24-26) with 45.1% odds of 1 hike and 25.0% of 2 hikes. At least the odds of 3 hikes are now back down to low single digits at 4.2% (vs. 18.5% 1 month ago).
The “steep vs. flat” outcome will be heavily influenced by views on oil and new trade clashes and tariffs. There is also the question around how successful the Bessent liability management plan on the long end of the curve will be whether it is by a “twist” with short term debt or by deployment of the US Treasury general account.
Many eyes are looking out for any hint of wage pressure that has not shown up at all at this point (see Payroll Deltas July: Mixed Bag, Mediocre Numbers 8-9-26). Negative real wages in a steady economic cycle are supposed to move the needle higher on wages, and that affordability discontent can show up in politics (election year) and policy decisions. Collective bargaining also can play a role.
The above UST history revisits the shift from the Carter inversion and peak of 1978 across the stagflationary 1980-1982 double dip that kicked off with an Iranian oil crisis in 1979.
We see the 9-16-24 UST curve sitting on the bottom during the late stages of the Biden administration, but we suspect Trump, Hassett, and Bessent will not be flagging that memory. After all, the UST curve had sent mortgage rates higher again after team Trump was put in office. We are still well below the peak mortgage rates of Oct 2023.
One of the key takeaways from history is that flat curves that arrive after some FOMC tightening in a cyclical peak can lead to trouble. The question will get louder if the Fed tightens by year end.
Worries get worse if we start to see an inversion. Credit market peaks such as the transition across 1989 into 1990, the move into 2000 after a +86% NASDAQ year in 1999, and the tail end of 2006 on the way into 2007 all make for some interesting compare-and-contrast drills.
We look at some of these histories in the links at the end of this commentary.
The above offers some more granularity on the migration from 9-16-24, across the pre-Iran war period and then to the current post-Iran Friday close. We include the UST curve from the peak 10Y date (10-19-23) when the 10Y hit 5.0% intraday.
We have been updating various US segment slopes each week, and the above updates the 3M to 5Y slope. The current +55 bps as of Friday close is in a very different place than the median inversion across the tightening cycle. Back during the ZIRP years and crisis, the peak slopes encouraged extension and risk taking as cash was a low return asset. The +55 bps is well below the post-1984 median of +104 bps. In theory, this is where the FOMC case for easing will need some help from inflation.
The above chart shortens up the timeline from the start of 2021 when the pent-up demand and GDP recovery was back in action and the tightening cycle soon got underway in March 2022 on the way to a -197 bps inversion in May 2023 from the May 2022 peak slope of +221 bps.
Some UST curve histories:
Business Cycles: The Recession Dating Game 10-10-22
UST Curve History: Credit Cycle Peaks 10-12-22
Bear Flattener: Today vs. 1994 and Aftermath 10-18-22
Fed Funds, CPI, and the Stairway to Where? 10-20-22
Greenspan’s First Cyclical Ride: 1987-1992 10-24-22
UST Curves: Slope Matters 10-25-22
Greenspan’s Last Hurrah: His Wild Finish Before the Crisis 10-30-22
Wild Transition Year: The Chaos of 2007 11-01-22
UST Slope Update: Some New Inversion Highs 12-8-22
Yield Curve Lookbacks: UST Shifts at Cyclical Turns 10-16-23
UST Moves 1978-1982: The Inflation and Stagflation Years 10-18-23