Bond investors, including those at ABNAMRO Investment Solutions and Brandywine Global Investment Management, are expressing skepticism about the growing market speculation that Federal Reserve Chair Kevin Warsh will soon raise interest rates. After Warsh reaffirmed his commitment to curbing inflation during a closely watched speech last Friday, interest rate swap traders now price in a greater than 50% chance of a rate hike at the Fed's next policy meeting in mid-September. While much ultimately depends on this week's employment figures and subsequent inflation data, the policy-sensitive 2-year Treasury yield posted its largest gain in over two months.

Yet, despite the chair's repeated vows to push down price pressures, his recent public appearances have repeatedly rattled markets over the past few months, leaving some investors wary. They are preparing for the risk that Warsh will again hold rates steady, just as he did in June and July, a scenario that deepens concerns over the Fed's credibility and has driven long-end yields to their highest levels in roughly two decades. TD Securities stated on Friday that its base case remains for the Fed to stand pat. For Christophe Boucher of ABN AMRO, Warsh's remarks are not yet enough to convince him that policymakers will follow through. He is steering clear of longer-dated bonds that are vulnerable to worries that the Fed may fail to control inflationary pressures. As the bank's chief investment officer, Boucher noted, "The reaction function is still unclear," adding, "If Warsh does not support a September hike this time and inflation remains elevated, credibility concerns could indeed resurface."

Since Warsh took office in May, investors have been adapting to his communication style, which offers less forward guidance on rate policy than his predecessor's. In a research note last Friday, ING observed that Warsh "is keen not to offer forward guidance, but his language is laden with forward guidance hints." At his first press conference as chair in June, his commitment to bringing inflation back to the Fed's 2% target reassured investors concerned he might bow to President Trump's push for rate cuts. The 2-year yield moved sharply higher and the yield curve flattened. In July, he triggered the opposite reaction, with the most pronounced steepening of the curve since August 2025, as long-term yields climbed and investors noted he failed to clearly explain the committee's decision to leave rates unchanged.

Warsh is moving the bond market with "all talk and no action," according to Brandywine's portfolio manager Tracy Chen. She says Warsh told the bond market what it wanted to hear last week, but "talk is talk," and "action is what matters." Chen maintains her underweight position on long-dated Treasuries, although she trimmed that stance after the Treasury Department said this month it would "at least double" the scale of purchases under its planned buyback program for 10- to 30-year outstanding debt. Of course, the incoming economic data will be critical, particularly Friday's monthly jobs report, following last week's figures showing U.S. employment growth over the past year through March was more moderate than previously reported. Still, Warsh has described the U.S. labor market as "performing well," and his focus lies on the price-stability side of the central bank's dual mandate. In that regard, since the FOMC's July decision, weaker-than-expected inflation reports have validated the decision to hold rates steady. On Friday, Warsh said that although recent inflation data have improved, they are not yet sufficient to point to a meaningful trend.

Regarding the Fed's role, George Catrambone, head of fixed income at DWS Americas, said, "There is a risk that the market continues doing the Fed's job, overpricing the odds of a hike, while the Fed does not follow through as data soften." He added, "The issue is not the fact we are above the 2% target itself, but the direction the economy is heading." In his view, recent reports, such as retail sales and employment, do not signal an economy that is re-accelerating. He describes U.S. Treasuries as looking "quite attractive." With the economic outlook in question and in the absence of forward guidance like that of Warsh's predecessor, interest rate swap traders are increasing their hedges for next month, currently pricing in roughly a 60% probability of a hike. Goldman Sachs researchers, including George Cole, argue that "if there is a lack of clearly dovish inflation news, follow-through action will be vital," and "should September be viewed as a coin flip and the Fed again keeps rates unchanged without a clear explanation, the yield curve runs a high risk of reliving the post-July FOMC meeting move." Strategist Edward Harrison said, "If the Fed does follow through with a hike, the initial market reaction, a bear flattening, would be a likely outcome. However, given that the 30-year yield initially fell after Warsh's hawkish statement, this suggests the Fed's credibility has been bolstered, which could ultimately support long-duration fixed income assets by pulling down both real yields and breakeven inflation rates."