Warsh's First Rate Decision Boosts Long-Dated Treasuries, Morgan Stanley Warns of Short-End Volatility

According to Citadel Securities, long-dated U.S. Treasuries have outperformed short-dated ones since last week's Federal Reserve meeting under new Chair Kevin Warsh. The 2-year/10-year yield spread narrowed from approximately 40 basis points to 27 basis points, while the 2-year/30-year spread compressed from 90bp to 71bp, reflecting a flattening yield curve. Citadel believes Warsh's strong anti-inflation stance and policy decisiveness will enhance Fed credibility, stabilize long-term rates, and lower term premium demands.

Morgan Stanley strategist Matthew Hornbach's team cautions that Warsh's reforms—shorter policy statements and reduced forward guidance—may mirror the Alan Greenspan era, triggering significantly higher short-end rate volatility. The 2-year Treasury yield posted its largest single-day gain in over a year following the Fed meeting, with investors now bracing for potential rate hikes. The ICE BofA MOVE Index, measuring Treasury market volatility, has retreated to its lowest level since February.