Just the TIPS

Fed boss Kevin Warsh: the bond market just lost some respect.

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  By Guest Blogger Scott Booth

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Alright, let’s talk about the bond market.

The yield on long-term treasuries (30 years) recently crept through the top of its multi-year trading range and pushed up near 5.25%.

Haven’t seen that since 2007.

Apparently, the Bond Vigilantes wanted Kevin and the rest of the voting Federal Reserve Governors to do something about this pesky inflation thing.

They did not.

Buying a house? The rates on 30-year fixed mortgages sit at about 6.6% in the U.S, their highest since August 2025, according to recent Freddie Mac data.

This won’t help the already cool housing sector.

Auto loans, personal and corporate borrowing all track Treasury yields, so higher yields tighten financial conditions and constrain growth.

This has been manageable so far, as economic expansion continues, households keep buying stuff and the labour market doesn’t seem to be showing any significant cracks.

Last week, after what Mr. Warsh described as a good family fight, the Federal Open Market Committee (FOMC) voted 9-3 in favour of leaving the Fed funds rate unchanged at 3.5% to 3.75%, where it has been since the central bank’s last cut in December.

This perplexed a bunch of people.

At his inaugural press conference as Fed chair back in June, the new honcho made it clear that price stability was the metric by which the success or failure of his tenure at the helm would be measured.

Following that first presser, there had been speculation the goalposts for price stability had moved, as the new Fed chair indicated it was only the number to the left of the decimal place that mattered.

I’ll admit that had me wondering if they would be rounding 2.9% inflation down to 2% and declaring mission accomplished.

If this were the new reality, it would certainly require revaluation in the market…and we did see rates mov higher, in part to price this unknown.

Following the latest rate decision, Mr. Warsh clarified that price stability means inflation at 2%.

This removed some uncertainty.

But,

Prices are clearly running hotter than that price stability goal…and the Fed failed to take action to combat their advance.

Short term rates fell (less hikes) in the wake of the latest monetary policy decision and long-term rates moved higher (inflation expectations).

Translation…Some market participants aren’t convinced this tough talk about stable prices will be walked.

Commitment is being questioned and credibility has been diminished.

U.S. Treasury Yield Curve

Source: Turner Investments, Bloomberg.

It has been a tough year for bond investors, as the increase in rates has weighed on market prices.

Cash equivalents, floating-rate securities and bonds offering inflation protection have fared relatively well, generating positive total returns as inflation pressures mount and expectations of policy rate hikes increase.

Treasury Inflation-Protected Securities (TIPS) are U.S. government bonds designed to protect investors savings from the ravages of inflation.

They are up so far this year.

How TIPS Work

• Principal adjustments: The face value of the bond goes up when inflation rises and down if there is deflation, tracked using the Consumer Price Index (CPI).
• Interest payments: TIPS pay interest every six months. The fixed rate applies to the adjusted principal, meaning their payout grows if inflation goes up.
• Maturity payout: When the bond matures, the investor either gets back the new adjusted principal or the original principal investment, whichever is higher.

The relative appeal of TIPs compared to ordinary Treasury bonds will ultimately be determined by the Breakeven Inflation Rate and how inflation progresses over the time the security is outstanding.

If actual future inflation turns out higher than the breakeven rate, TIPS will generate a better total return than standard bonds. If inflation is lower, standard bonds win out.

5-Year Breakeven Inflation Rate

The current 5-year Breakeven rate sits at 2.23 % and has been coming down since Mr. Warsh took the helm at the Fed. The decline in Break-evens seems indicative of the market endorsing the Fed’s commitment and ability to reign-in inflation.

Where to from here?

Expect rate hikes.

Fed credibility is paramount and they need to make a recovery effort.

The quagmire of conflict in the middle east seems unlikely to be resolved anytime soon.

Expect this to keep energy and commodity prices elevated and inflation stubbornly high.

Fiscal and social security funding concerns are not going away or improving.

War is expensive.

Action is required.

The Federal Reserve will either succeed in restraining the advance in prices or they won’t.

TIPs give investors the ability to diversify portfolios and hedge the risk they don’t.

Scott Booth, CFA, is a seasoned financial advisor and licensed portfolio manager. Over the past 18 years he has worked in the capital markets as an analyst, trader and advisor with major banks and now with Turner Investments.

Source: https://www.greaterfool.ca/2026/08/04/just-the-tips/