Swap-implied odds of a mid-September Fed rate hike have moved above 50% after
Fed chair Kevin Warsh reiterated his determination to curb inflation. The move
pushed policy-sensitive US two-year Treasury yields to their largest gain in
over two months. Institutional bond managers, including ABN AMRO Investment
Solutions and Brandywine Global Investment Management, said they remain
skeptical that rhetoric alone will prompt a rate increase. ABN AMRO CIO
Christophe Boucher said he is avoiding long-duration bonds because they are
vulnerable to concerns the Fed may be unable to control inflation, and warned
the Fed's policy reaction function remains unclear; if Warsh does not back a
September hike while inflation stays stubborn, market worries about Fed
credibility could resurface. The ultimate decision will hinge largely on this
week's nonfarm payrolls and subsequent inflation prints.
