Pressure is rising in the U.S. Treasury market as fiscal deficits, inflation pressures, and the AI financing boom continue to lift long-term borrowing costs, according to BlockBeats on Sept. 9.
What markets appear to be waiting for is not necessarily a restart of quantitative easing by the Federal Reserve, but a clearer explanation from Chair Kevin Warsh of the central bank’s policy reaction function.
10-year Treasury yield nears highs seen since 2025
Global bond yields have continued to move higher in recent weeks, with the 10-year U.S. Treasury yield now around 4.80%, close to its highest level since 2025.
At the same time, expectations for future Fed rate hikes have picked up. Investors are also concerned that the U.S. fiscal deficit and corporate financing demand for AI infrastructure could drive long-term yields even higher.
Warsh said at the Jackson Hole meeting that more work remains to be done on inflation. Markets interpreted that remark as a sign that another rate hike remains possible.
Current market pricing shows about a 60% chance of a Fed hike next week. If that happens, it would be the first rate increase in more than three years.
Markets want guidance on the Fed reaction function, not QE
Analysts said the bond market is currently missing a clear explanation of the Fed’s reaction function: which economic indicators officials are watching, how they balance inflation risks against growth risks, and what developments would cause a policy adjustment.
Clearer communication from the Fed could reduce investor uncertainty around inflation and the future path of monetary policy.
By contrast, while the Fed still has a balance sheet of about $6.7 trillion and can influence longer-term rates through quantitative easing, markets broadly see a low chance that Warsh would restart QE.
Warsh has previously criticized large-scale asset purchases, saying they can distort wealth distribution, and he has also stressed the importance of Federal Reserve independence.
With fiscal deficits, inflation, and the AI financing wave all pushing up long-end yields, the report said the more realistic option for the Fed may not be another use of the balance sheet. It may instead be clearer policy communication that convinces markets the central bank will act if inflation pressures persist.