Traders Are Charging a ‘Warsh Premium', and It's Costing the Fed 100 Basis Points

Former Dallas Federal Reserve President Robert Kaplan says bond traders are adding a ‘Warsh premium’ to Treasury yields. They cannot yet read Fed Chair Kevin Warsh, in his view.

Kaplan, a Goldman Sachs vice chairman and former Dallas Fed President, told CNBC that markets are pricing in more tightening than the Fed projected. He said the repricing began right after Warsh’s September press conference.

Why Kaplan Sees a Warsh Premium

The Fed raised rates by 25 basis points to 3.75% to 4% on September 16, its first hike since 2023. Its updated dot plot, a chart of each official’s rate projections, shows one more increase this year.

Kaplan said markets still struggle to read Warsh, who declined to submit his own projection. In his view, traders are therefore demanding extra compensation, known as a risk premium, to hold Treasurys.

However, long-term yields have climbed sharply. The 10-year Treasury yield sits near 5.25%, close to its highest level since 2007. That is more than 100 basis points above a year ago. Kaplan links part of that move to the premium.

Diesel Adds a Second Risk Premium

Kaplan pointed to a second driver, the risk that the Iran war keeps diesel elevated far longer than expected. He said diesel costs are already spreading into 30 or 40 items.

Meanwhile, he said Ukrainian strikes have left about half of Russia’s refineries offline or damaged. Melissa Brown, global head of investment decision research at SimCorp, told TheStreet the Fed has little control over supply-side inflation.

Still, Kaplan would skip an October hike and revisit in December. He said that matches New York Fed President John Williams, whose comments cooled expectations for an October rate hike.

In contrast, Kaplan doubts the bond market has the Fed right.

“I think the market may be overestimating what the Fed actually does, but time will tell.”

Robert Kaplan, Vice Chairman, Goldman Sachs, via CNBC

Kaplan said calmer oil and diesel prices would help yields ease. Higher yields typically weigh on risk assets such as Bitcoin (BTC). The dollar’s best month since June could add to that pressure.

Whether the Warsh premium fades may now depend on diesel as much as on the Fed chair.