Morgan Stanley’s Jim Caron says investors may need to rethink how they read the bond market if Kevin Warsh’s approach at the Federal Reserve takes shape. Rather than focusing mainly on the 10-year and 30-year Treasury yields, Caron argues that the more important signals could move to the short end of the curve, where policy changes are felt first.
The reasoning, according to Caron, is tied to Warsh’s interest in fresher data and a more real-time policy approach. If the Fed relies less on backward-looking surveys and less on long-range forward guidance, short-term bonds could become more sensitive to shifts in inflation and rate expectations. In that setup, the front end of the yield curve would absorb more of the market’s reaction, while longer-dated Treasuries could become steadier over time.
Caron said that could matter well beyond trading desks. Because corporate borrowing and home mortgages are often priced off longer-term rates, less volatility at the back end of the curve could be welcome news for businesses and homeowners. He described the front end as a kind of shock absorber for the longer end, and said investors should pay closer attention to short-term rates than to the usual headline focus on 10- and 30-year bonds.
The Morgan Stanley executive also pushed back on the idea that Warsh should be labeled simply dovish or hawkish, saying that view would be too simplistic. He noted that Warsh has taken positions on both sides of the debate, and said any response from the Fed would likely depend on the data rather than a fixed ideological stance.
Source: fortune.com
