Former Dallas Fed President Robert Kaplan suggests that bond traders are applying a 'Warsh premium' to Treasury yields. This risk premium stems from market uncertainty regarding the policy direction of Fed Chair Kevin Warsh, who did not provide his own rate projection during the September press conference.
The 10-year Treasury yield has reached approximately 5.25 percent, marking its highest level since 2007 and an increase of over 100 basis points compared to the previous year. Kaplan notes that markets are currently pricing in more aggressive monetary tightening than the Federal Reserve has officially projected.
A second factor influencing yields is the risk of sustained high diesel prices caused by the conflict in Iran and Ukrainian strikes on Russian refineries. Kaplan stated that these energy costs are impacting the pricing of 30 to 40 different items, complicating the inflation outlook for the Federal Reserve.
Kaplan suggests skipping an October rate hike, aligning with the stance of New York Fed President John Williams. He believes the bond market may be overestimating future Fed actions, noting that a stabilization in oil and diesel prices could help alleviate the current upward pressure on Treasury yields.
