Treasury Yields Slip on Fed Leadership Buzz and Data Delays

U.S. Treasury yields declined on Tuesday as traders weighed the possibility of a major policy shift at the Federal Reserve and navigated economic data delays caused by a partial government shutdown.

Market focus has intensified on Kevin Warsh, who President Donald Trump selected on Friday to lead the central bank when Jerome Powell’s term concludes in May. Though previously known as an inflation hawk, Warsh is now advocating for lower interest rates.

This potential change at the top is creating complex crosscurrents in the bond market, pushing yields lower while reshaping expectations for the Fed's long-term strategy.

A New Fed Playbook Under Warsh?

Jason Pride, chief of investment strategy and research at Glenmede, anticipates the Fed will cut rates twice this year by 25 basis points each—a scenario he notes is already largely priced into the market.

However, the more significant impact of a Warsh-led Fed could be on its massive balance sheet. Warsh has been a vocal critic of the Fed's large holdings, arguing they distort the financial system. In a November Wall Street Journal opinion piece, he stated, "the Fed's bloated balance sheet, designed to support the biggest firms in a bygone crisis era, can be reduced significantly."

This stance is causing the yield curve to steepen. Pride explained that Warsh has been "a strong advocate against the overuse of the Federal Reserve's balance sheet." At the same time, his view on short-term rates "is very much in line with the Federal Reserve's policy up until now, and maybe even a little bit dovish relative to it."

Bond Market Responds to Uncertainty

The mixed signals are being reflected in Treasury prices:

• The 2-year Treasury note yield, sensitive to Fed rate expectations, edged down 0.2 basis points to 3.568%.

• The benchmark 10-year Treasury note yield fell 1 basis point to 4.268%.

The spread between the two-year and 10-year yields, a key gauge of the yield curve, narrowed slightly by half a basis point to 69.5 basis points. This followed a move to 72.7 basis points on Monday, its steepest level since April. Adding to the downward pressure on yields was a sharp selloff in stocks on Tuesday, which likely boosted safe-haven demand for government debt.

Data Delays and Market Crosscurrents

Compounding the uncertainty is a lack of clear economic signals. Thomas Simons, chief U.S. economist at Jefferies, pointed out that some traditional market correlations have broken down recently, making it difficult to determine what is driving asset prices.

"It feels like the market's having a hard time assessing whether or not there is a kind of broad risk-off or risk-on tone at any given time because of all the crosscurrents," Simons said.

The partial government shutdown has exacerbated this issue by delaying the release of January's crucial employment report, originally scheduled for Friday. While the U.S. House of Representatives narrowly approved a deal on Tuesday to end the shutdown, the data blackout has left investors flying blind.

The Outlook for Inflation and Rates

Recent economic data had pushed market expectations for the next Fed rate cut to June. However, a significant slowdown in the labor market, once the data is released, could accelerate that timeline.

Looking further ahead, Pride projects the U.S. economy could see above-average growth in 2026 as tariff headwinds fade and fiscal stimulus takes effect. He warned this could raise inflation risks, keeping it a primary focus for the Fed.

The debate within the central bank continues. On Tuesday, Richmond Fed President Tom Barkin noted that while rising productivity is helping to ease cost pressures, its persistence is hard to predict, making future monetary policy decisions difficult. In contrast, Fed Governor Stephen Miran, speaking on Fox Business Network, continued to argue for aggressive interest-rate cuts this year.