SocGen Says 'Unhinged' Yields Pose Early Test for Warsh

Summary

Subadra Rajappa of Societe Generale argues that Treasury yields are becoming unhinged, testing new Fed Chair Kevin Warsh. She cites rising debt and deficits, higher oil prices, and stubborn inflation as key risks. Rajappa warns the Fed must shift to a neutral or tightening bias to maintain credibility, but sees limited policy options from the Treasury.

• Bond market is testing the new Fed leadership and Congress over debt and deficits.
• Long-end yields are rising on fiscal concerns; front-end is pricing in rate hikes.
• Inflation expectations must be kept in check to avoid a policy crisis.
• Defense spending request for FY2027 could worsen the debt trajectory.
• Higher oil prices and prolonged conflict add upward pressure on yields.
• A Fed-Treasury accord is too soon and may not be effective this time.
• The FOMC consensus is slowly moving toward a neutral stance, with some hawkish members favoring hikes.
• Debt financing costs will continue to rise if interest rates stay high.