Bond Market Has Already Tightened for the Fed — DoubleLine: Warsh Has No Need to Rush Rate Hikes
Miles Bennett
DoubleLine deputy CIO Jeffrey Sherman argues that the bond market has done part of the Fed's tightening work — the yield curve slopes upward, policy rates sit below every other rate on the curve, and Chair Kevin Warsh may not need to act yet, though the bar for a September hike is not low either.
What has the bond market already done for the Fed?
The yield curve (a line connecting Treasury rates across maturities) is upward-sloping, with the policy rate below every other rate. This means → the market itself is pushing borrowing costs higher, effectively doing part of the Fed's tightening.
Fed-funds futures pricing has shifted: markets no longer bet on steady rate cuts as they did for three years. Instead, they now price in a possible hike within the next year.
Sherman's bottom line: Warsh "may not need to take any action for now — he can sit back and watch."
The "dove in hawk's clothing" trade — what went wrong?
Markets had bet that Warsh was a dove dressed in hawkish rhetoric — talk tough, then cut. Sherman says that trade is breaking down.
He expressed approval of Warsh's public stance: "What he's said makes a lot of sense — we need to fight inflation. But the outcome still depends on the data."
For those betting on a September hike, Sherman sees a high bar: it would take "a lot of data" to force the Fed's hand — especially with an election approaching.
June CPI cooled — so why won't Warsh ease up?
June CPI came in well below expectations: headline fell 40 basis points month-on-month; unrounded core CPI was negative 2 basis points — the first negative monthly reading since 2020.
Inflation swaps (derivatives that bet on future inflation levels) cooled in response; the one-year rate briefly dipped below 2%.
But Warsh's response at a congressional hearing was measured: "It's just one data point — we shouldn't get too optimistic." In plain terms = one good month does not make a trend.
Is core PCE the number that really keeps the Fed up at night?
Unlike CPI, core PCE is still accelerating. This reflects two counterintuitive drivers: AI demand is pushing up software spending, and rising stock prices are lifting portfolio-management fees.
The Bureau of Economic Analysis will recalibrate PCE data in September, updating how it measures software and management-fee components. This means → the revised annualized PCE could come in 20 to 30 basis points lower than current readings.
In plain terms = today's core PCE may be overstated, but until the September recalibration arrives, the Fed must decide on the numbers it has.
What yields can fixed-income investors get right now?
Investment-grade corporate bonds yield roughly 5%–5.5%; residential mortgage-related assets about 5.3%–5.8%; high-quality CMBS (commercial mortgage-backed securities) around 5.1%; top-rated CLOs (collateralized loan obligations) also about 5.1%.
Sherman's take: "The positive is we finally have some yield." But anything above 6% requires taking on risk.
Year-to-date, CLO returns run about 2.5%–2.9%, high-quality bank loans about 2.6%, while CCC-rated loans sit at the bottom — software names in particular are under pressure.
How risky are high-yield and private credit right now?
CCC-rated high-yield bonds now yield roughly 14%; leveraged loans reach about 16%. Sherman's warning is blunt: "Sounds great, but how much principal you'll get back is another question."
He flagged particular caution on AI-related debt financing: if someone pitches a private bond at 10%–11% yield while calling it "investment grade," "from a public-market perspective, the risk is not low."
Sherman also noted a key threshold: if the 10-year Treasury yield breaches roughly 5.25%, pricing dynamics across other markets could shift. Whether subsequent inflation data continue to improve will determine the window for Warsh to act.
Content is for reference only, not financial advice.