By Patti Domm

It is early days, but the bond market may already be showing Federal Reserve chair nominee Kevin Warsh just how hard it could be to lower long-term interest rates.

Markets had been stoked for a dovish replacement for Fed Chair Jerome Powell, whom President Donald Trump has criticized for not lowering interest rates fast enough. But now there are questions about whether Warsh is really committed to slashing interest rates, based on past remarks he made about the Fed and its policy.

The benchmark 10-year Treasury yield rose modestly on Jan. 30, the day Trump announced Warsh's nomination. The yield has since fallen to 4.15% Tuesday, reverting to the 4.1% to 4.2% range it had been in for weeks ahead of the White House announcement.

When yields rise, bond prices fall.

The bond market's immediate reaction has been "a little bit toward the hawkish side." said John Briggs, head of U.S. rate strategy at Natixis Corporate and Investment Banking.

Longer-term yields are elevated compared with shorter duration yields. The distance between yields at the long end and those at the shorter end, like the two-year, is widening.

That so-called steepening of the yield curve signals the market has economic concerns, including about the size of the U.S. deficit. It also indicates U.S. rates may stay higher even if the Fed does cut interest rates.

Warsh's appointment probably means yields will be slightly higher than they otherwise might be with another Fed chair choice. The 10-year is impacted by the market's belief that Warsh would be more willing to use higher interest rates to fight inflation.

Warsh has criticized the Fed's use of its balance sheet. Many in the markets expect him to try to shrink the $6.6 trillion balance sheet and be reluctant to use quantitative easing as part of the Fed's toolbox.

But Mike Cudzil, senior bond portfolio manager at Pimco, said the market has taken the appointment in stride with just a slight reaction. He doesn't expect a big departure from the way the Fed has operated.

"On the margin, I think markets view this as a slight evolution in the Fed," Cudzil said. The immediate market reaction was "slightly steeper curve, slightly stronger dollar, but all of that is in the context of ranges where markets had been for the better part of several months."

The U.S. market is also tethered to global bond yields, including Japanese debt. The yield on the 10-year Japanese government bond has risen by nearly a percentage point over the past year. That pulls U.S. yields up along with it.

The results of a snap election Sunday reinforced the upward trend in Japanese yields, though the widely watched 40-year bond yield fell on the news. Japanese Prime Minister Sanae Takaichi's party won a supermajority, endorsing her plans for looser fiscal spending and tax cuts.

Heavy spending on AI by U.S. companies is also affecting longer-end treasury rates. major tech companies are issuing debt to fund construction of data centers. Oracle last week issued $25 billion in bonds. Billions more in AI-related offerings are expected from companies like Amazon, Alphabet, and Meta. All that competition tends to push up Treasury yields.

And if Warsh does shrink the balance sheet, that will mean the Fed will hold fewer longer-duration Treasury bonds.

But Cudzil doesn't believe Warsh will let yields spike.

Warsh has also said he wants the fed to coordinate more with the Treasury about how the two agencies deal with debt. The Fed, for example, could match the structure of its balance sheet to Treasury issuance. Treasury Secretary Scott Bessent led the search for the Fed chair. Both he and Warsh worked with famed investor Stanley Druckenmiller.

Treasury Secretary Scott Bessent said on Fox Business's Sunday Morning Futures that it would likely be "at least a year" before the Fed changed its balance sheet.

Warsh hasn't spoken publicly since his nomination. The bond market has moved into a holding pattern while traders parse his past statements.

"He has talked about things like not using the balance sheet as much, making it smaller but using interest rate policy more," said Jim Caron, chief investment officer of the Portfolio Solutions Group at Morgan Stanley Investment Management.

"What I think effectively changes is what Warsh wants to do is bring the Fed back to its traditional mission, not the dual mandate," said Caron. That would mean controlling money supply through interest rate policy rather than focusing on trying to balance full employment and price stability.

"Warsh is neither hawk or dove," said Caron.

Warsh's focus is instead on ending what he sees as the balance sheet's distortions on the markets. Investors will have to wait and see if he can do that while still pulling down longer-term rates.

Write to editors@barrons.com.

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February 10, 2026 15:59 ET (20:59 GMT)

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