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Rising volatility in the US bond market has become the first major challenge for incoming Federal Reserve Chairman Kevin Warsh, according to a report by Jefferies.
The report stated that the "stress test" for the new Fed chairman has effectively begun after the US 10-year Treasury bond yield sharply crossed the 4.5 per cent mark last week amid rising inflation concerns and growing volatility in financial markets. The US 10-year Treasury yield increased from 4.31 per cent on May 7 and 4.43 per cent last Thursday to a recent high of 4.685 per cent on Tuesday. The yield was later trading around 4.60 per cent. The report also highlighted a sharp rise in bond market volatility, with the MOVE Index climbing from 69.6 last Thursday to 86.1 on Monday before moderating slightly to 81.5. Jefferies said the MOVE Index, which tracks volatility in the US Treasury market, has become more important than the VIX index in monitoring investor risk aversion. It also stated that, given recent US inflation data money markets have, for now at least, given up any hopes of Fed easing this year and there are even growing expectations of a rate hike. The report noted that government bonds in G7 economies are increasingly being priced based on fiscal supply concerns rather than only traditional inflation and employment indicators. It added that government bonds are also a critical source of collateral in the global financial system, making movements in bond yields more important for overall market stability. Jefferies stated that one of the major triggers behind the sharp increase in bond yields was the release of US April Producer Price Index (PPI) data last week. According to the report, US PPI inflation rose by 6 per cent year-on-year in April against market estimates of 4.8 per cent. On a monthly basis, PPI surged 1.4 per cent, equivalent to an annualised rate of 17.8 per cent. The report said this was the clearest evidence so far of the economic impact of the closure of the Strait of Hormuz beginning to move through the system. Investors are now increasingly expecting higher producer prices to eventually feed into broader consumer inflation indicators including CPI and PCE inflation, Jefferies noted. Jefferies added that rising bond yields, inflation concerns and elevated market volatility are likely to create a challenging environment for Kevin Warsh as he prepares to take charge as the new Federal Reserve Chairman on Friday. US President Trump will host the swearing-in ceremony for incoming Federal Reserve chair Kevin Warsh on Friday. The swearing-in ceremony assumes importance as Trump has personally taken keen interest in the appointment of Warsh after disagreements with Powell over interest rate cuts. On May 14, the White House had informed that Kevin Warsh had been confirmed as the Chairman of the Board of Governors of the Federal Reserve System. (ANI)
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