Fed Chairman Kevin Warsh warned about inflation — but that's not why long-term rates are surging: Chart of the Day

Long-term Treasury yields have been climbing, causing investors to reconsider the narrative surrounding inflation. The 30-year Treasury yield (^TYX) rose about 10 basis points, or 0.1 percentage point, following Fed Chairman Kevin Warsh's speech at the Jackson Hole conference. Half of this increase occurred on Monday. Now, it is nearing 5.27%, close to the late-July high that caused market turmoil and led Treasury Secretary Scott Bessent to increase bond buybacks to stabilize the market.

Warsh emphasized that inflation pressures are still too high during his Friday remarks, yet oil prices surged over the weekend due to Middle East tensions. However, a closer look at the bond market reveals an unexpected trend. While long-term inflation expectations have remained stable, and even slightly decreased, the primary driver of the 30-year yield surge has been real yields—what remains after factoring out inflation expectations.

It is crucial to understand this distinction, as it alters the story. Investors are not anticipating a significant rise in inflation over the next 30 years. Instead, they are demanding a higher return for locking up money in long-term Treasurys. Factors such as growth expectations, Federal Reserve policy, extensive government borrowing, and the additional compensation investors require for holding long-dated bonds can all contribute to higher yields.

The bond market's long end can move for reasons unrelated to the upcoming Federal Reserve meeting. When discussing the market's recent shift on Friday, Warsh offered a unique perspective. He stated that it would be difficult to characterize financial conditions as restrictive. Consequently, higher long-term borrowing costs could start to challenge that notion, even without additional Fed intervention.

The rise in long-term borrowing costs may also exert pressure on stocks, explaining why higher rates are emerging as a fresh headwind for equities despite strong earnings. As long-term borrowing costs approach this threshold, equities could face further headwinds. Bessent clarified this point in a recent Reuters interview, emphasizing that the Treasury cannot dictate the equilibrium price of yields.

"I don't think I can change the equilibrium price," Bessent stated. Jared Blikre is the global markets and data editor for Yahoo Finance, reachable on X as @SPYJared or via email at jaredblikre@yahooinc.com. For comprehensive analysis of the latest stock market news and events influencing stock prices, visit Yahoo Finance.