Rate realities await the next Fed Chair

Treasury yields edged higher to start 2026, as markets weighed a modest rise in the 10-year against the larger implications of Kevin Warsh’s nomination to lead the Fed. Investors now face a potential “regime change” in monetary policy, with Warsh signaling support for lower short-term rates alongside a smaller Fed balance sheet and greater focus on core mandates. This mix could ultimately favor a steeper yield curve over time, though near-term dynamics may be complicated by Treasury issuance strategies that counterbalance Fed actions.

Against this backdrop, solid above-trend US growth, fresh fiscal stimulus, and robust AI-driven investment are tilting rate risks modestly higher, leading to a slight underweight in duration. Even so, elevated real yields, lingering geopolitical and deflationary crosscurrents abroad, and bond-friendly investor flows argue for keeping that short position small while the new policy framework takes shape.