Why 30-Year Treasuries Rose Less Despite Warsh’s Hawkish Turn — Was Bessent the Reason?

A new policy mix may be taking shape in which Federal Reserve Chair Kevin Warsh and Treasury Secretary Scott Bessent address U.S. interest rates with different tools. The Fed would use short-term policy rates to contain inflation and inflation expectations, while the Treasury would use buybacks and issuance policy to manage liquidity and supply pressure in the long end of the market. The two have not formally agreed to such a division of labor. Still, their recent policy moves and public remarks suggest the roles could complement each other in practice.

Treasury Expands Treasury Buybacks

The Treasury moved first. On Aug. 19, it said it would more than double the cap on each liquidity-support buyback of nominal Treasuries with maturities of 10 to 20 years and 20 to 30 years, raising the limit from as much as $2 billion to at least $4 billion per operation. The change will apply from Sept. 10 through Nov. 4. The stated goal is not to defend any particular long-term yield, but to add liquidity to the long-dated Treasury market.

Bessent explained the policy more bluntly. In an Aug. 20 interview with CNBC, he said liquidity in the 30-year Treasury market was particularly poor and argued that yields were not reflecting underlying fundamentals. He described the bigger buybacks as a kind of "Treasury twist" meant to signal the market, and said purchases could exceed $4 billion per operation.

The Treasury has also signaled that it could adjust issuance policy in response to the Fed’s balance-sheet runoff. Bessent said that if the Fed reduces its Treasury holdings, "the Treasury and the Fed will work together." The Treasury, he said, would adjust issuance plans in line with maturing Fed assets and balance-sheet reduction.

If the Fed does not reinvest proceeds from maturing Treasuries into new securities, the Treasury must place with private investors the rollover supply the Fed no longer absorbs. If the Treasury also increases long-dated issuance, that would raise the amount of duration the private sector has to take on and could push long-term yields higher. If, instead, the Treasury cuts long-bond issuance or buys back outstanding long-dated debt, it can ease the supply burden created by the Fed’s balance-sheet runoff.

Bessent, however, drew a clear distinction between any such coordination and the Fed’s policy-rate decisions. Asked whether Treasury buybacks would conflict with Fed rate increases aimed at curbing inflation, he replied that the buyback decision announced that week had "nothing to do with that."

Warsh then used his Jackson Hole speech on Aug. 28 to define the Fed’s side of the divide. "Two percent is a firm and fixed target," he said. "Short-term interest rates are the principal tool for achieving our dual mandate." Unless officials are confident that underlying inflation is moving clearly and very quickly toward target, he added, "we still have work to do."

The speech reaffirmed the Fed’s preference for steering prices and aggregate demand with short-term policy rates rather than trying to move financial markets through routine long-bond purchases or balance-sheet expansion.

Warsh’s economic assessment also left the door open to further tightening. He said the personal consumption expenditures price index, the Fed’s preferred inflation gauge, was running at 3.7% over 12 months and a little above 4% at an annualized rate over the past six months. Of 199 PCE components, 54% rose more than 3% over the past 12 months, and 49% did so over the past six months. Summer inflation readings had come in better than expected, he said, but they did not show meaningful improvement in the underlying trend.

By contrast, Warsh said a labor market with a 4.1% unemployment rate was broadly consistent with full employment. Investment in equipment and intangible assets rose about 9% over the past four quarters, and earnings at S&P 500 companies climbed more than 20% over the past year. Corporate bond spreads and business lending markets also showed no clear signs of tightening, he said, making it hard to describe broad financial conditions as restrictive.

Markets took Warsh’s remarks as increasing the odds of a policy-rate hike. Based on Treasury constant-maturity yields, the two-year note rose 14 basis points at the Aug. 28 close from the previous day. The 10-year yield climbed 6 basis points, while the 30-year rose just 3 basis points. Reuters intraday data showed the two-year yield up about 11 basis points to 4.34%, the 10-year up 5 basis points to 4.72%, and the 30-year up 1.6 basis points to 5.206%. The implied probability of a quarter-point increase at the September Federal Open Market Committee meeting rose to 57% to 60% from 35% before the speech.

Focus Turns to Long-Term Treasury Yields

Investors focused on the fact that short-dated Treasury yields rose much more than long-dated yields. In other words, Warsh’s determination to fight inflation fed quickly into expectations of a near-term rate increase, but not to the same degree into longer-term inflation risk.

That is where some analysts see a link between Warsh and Bessent. Warsh is trying to contain inflation and inflation expectations through short-term rates. Bessent, by contrast, is trying to reduce the drag from poor liquidity by having the Treasury buy long-dated bonds directly in thinly traded parts of the market. Taken together, that creates a functional division of labor: the Fed handles short-term rates, while the Treasury manages long-end liquidity and supply.

Long-term Treasury yields reflect not only expectations for future short-term rates, but also compensation for holding duration and concerns about future inflation. If Warsh signals that rates may stay high or move higher, short-term yields can rise. But if the Fed establishes credibility around its commitment to the 2% inflation target, longer-term inflation worries could ease. If Treasury buybacks also help long-dated bonds trade more smoothly, the premium investors demand for poor liquidity could fall as well.

Warsh’s earlier thinking lends support to that interpretation. In July 2025, before becoming Fed chair, he argued that a new "Treasury-Fed accord" was needed. His view was that if the Fed chair explained the central bank’s long-term balance-sheet goals and the Treasury secretary laid out issuance plans around them, markets could better anticipate the supply of government debt coming from both institutions. Even then, he made clear that this would not mean the Fed set rates at the administration’s direction.

In that reading, the Fed would continue setting interest rates independently based on inflation and employment, while the supply shock created by the Fed’s balance sheet and Treasury issuance would be managed through coordination. If that line holds, the two sides could work together to stabilize the Treasury market without undermining the Fed’s independence.

Market strategists also focused on that separation of roles in Warsh’s speech. Christopher Hodge, chief U.S. economist at Natixis, said markets had been underestimating the risk of higher rates and that Warsh had strengthened confidence in the inflation fight by directly acknowledging the price problem and reaffirming the 2% target. Given solid growth, full employment and loose financial conditions, Hodge said, the Fed appears inclined to keep rates high or raise them further if inflation does not improve. He also highlighted Warsh’s emphasis on short-term rates, rather than the balance sheet, as the main policy tool.

Brian Storey, senior vice president for multi-asset strategy at Brinker Capital, said Warsh’s reaffirmation of the 2% target and the Fed’s responsibility had given the bond market some reassurance. Mark Cabana, head of U.S. rates strategy at Bank of America, said Warsh’s more orthodox inflation-fighting speech at Jackson Hole was helping calm the bond market.

Nathan Sheets, chief investment officer at SEI Investments, said the speech was difficult to read as anything other than hawkish and that markets had underestimated the Fed’s willingness to act. Karl Schamotta, chief market strategist at Corpay, said Warsh reduced ambiguity around the Fed’s 2% target and underscored the role of short-term rates. Gary Schlossberg, strategist at Wells Fargo Investment Institute, said the dots now point to at least one rate increase, and possibly more.

Even so, it is too early to say the policy mix has worked. The 30-year yield briefly fell intraday after the speech, but later turned higher. U.S. long-term borrowing costs have not actually declined.

The Treasury’s expanded buybacks have not yet begun. Markets may already have priced in some of the expectations created by the Aug. 19 announcement, but no operation above $4 billion has actually been carried out. The effect of larger buybacks on trading costs and yields in long-dated bonds cannot be tested until after Sept. 10.

Warsh’s policy path is not fully clear either. Ellen Hazen, chief market strategist at F.L.Putnam, said markets remain in the dark because the Fed has not disclosed its reaction function. Phil Blancato, chief market strategist at Osaic, said investors now have a better sense of where the Fed wants inflation to go, but still know very little about what combination of inflation and employment would trigger action. Michael Arone, chief investment strategist at State Street, said he had not yet concluded that the Fed would raise rates.

Peter Anderson, founder of Anderson Capital, said investors wanted a GPS for the economy but the Fed had given them a compass. Eugene Epstein, head of trading and structured products at Moneycorp, said Warsh had delivered hawkish messages before without following through, and that market confidence could weaken if this episode also fails to lead to a rate increase.

The Fed and Treasury could also end up clashing rather than complementing each other. Warsh said policymakers should receive "as unfiltered market signals as possible" from bond prices and trading volumes, the dollar, borrowing costs and commodity prices. The goal, he said, is to avoid a "hall of mirrors" in which markets price assets based on Fed rhetoric and the Fed then uses those same prices in policy decisions.

But if the Treasury buys large amounts of long-dated Treasuries directly, the very market prices Warsh wants to use for policy judgments would themselves be shaped by government intervention. Reuters columnist Gabriel Rubin said investors were now dealing with "two referees" in the Fed and the Treasury. Warsh wants markets to set prices on their own, while Bessent is blowing the whistle directly in the long-bond market.

If Treasury intervention grows too large, it could create other side effects. Dirk Willer, Citigroup’s head of global macro and asset-allocation strategy, said that if the Treasury tries too aggressively to hold 30-year yields below a certain level, investors may shift into bonds in other countries where governments are not controlling prices, weakening the dollar. The Treasury still has tools left, he said, but the question is how many shots remain and when they run out.

Events to Watch Next

Ultimately, whether the Warsh-Bessent policy mix works will hinge on three upcoming policy events. The first is Sept. 9, when the expanded buyback program begins. It will not be enough to judge success simply by whether the Treasury buys more than $4 billion of long-dated bonds. Investors will also need to see how much of the debt offered for sale the Treasury actually purchases, whether trading in older and less liquid bonds becomes easier, and whether the yield gap between newly issued and outstanding bonds narrows.

If those indicators improve but the 30-year yield keeps rising, the main driver of higher long-term yields would appear to be not poor liquidity but the U.S. fiscal deficit, high real rates and the growing volume of Treasuries the market must absorb.

The second test is the Sept. 15-16 FOMC meeting. Markets raised the odds of a rate increase to 57% to 60% after Warsh’s speech, but he did not promise a hike. At the end of the speech, he said he was committed not to any specific decision, but to discipline. Whether the Fed actually raises rates, or explains under what conditions it would do so while leaving rates unchanged, will shape confidence in Warsh’s inflation-fighting stance.

The third is the Treasury’s quarterly refunding plan on Nov. 4. The Treasury has said it will announce buyback sizes beyond that date then. The key questions are whether it extends long-bond purchases above $4 billion per operation, how it adjusts the issuance mix between short- and long-dated debt, and whether it lays out concrete issuance guidance tied to changes in the Fed’s balance sheet.

If the policy mix works as intended, Treasury buybacks should reduce trading costs in long-dated debt while the Fed uses short-term rates to anchor inflation expectations. That should show up in stable 30-year yields and long-term inflation compensation, along with stronger demand at long-bond auctions.

If, by contrast, 30-year real yields keep rising, long-bond auctions remain weak, and the Treasury has to repeatedly increase buyback sizes, markets are likely to see that not as a successful division of labor but as a failed attempt at price management. If the dollar also weakens, that may signal the risk removed from Treasury yields has simply shifted into the foreign-exchange market.

Kim Joo-wan, Hankyung reporter kjwan@hankyung.com