Kaplan: 'Warsh Premium' Adds 100 Basis Points to Treasury Yields

Former Dallas Federal Reserve President Robert Kaplan believes bond traders have introduced a 'Warsh premium' into Treasury yields. In his assessment, they have not yet figured out Fed Chair Kevin Warsh.

Kaplan, currently a vice chairman at Goldman Sachs and formerly head of the Dallas Fed, told CNBC that markets are pricing in more tightening than the Fed's own projections. He stated that the repricing began immediately after Warsh's September press conference.

Why Kaplan Sees a Warsh Premium

On September 16, the Fed raised rates by 25 basis points to a range of 3.75% to 4%, marking its first rate increase since 2023. The updated dot plot, which shows each official's rate projections, indicates one more hike this year.

Kaplan said markets still find it difficult to interpret Warsh, who chose not to submit his own projection. According to Kaplan, traders are therefore demanding extra compensation, a risk premium, to hold Treasurys.

Long-term yields have risen sharply, however. The 10-year Treasury yield is near 5.25%, close to its highest since 2007. That represents an increase of more than 100 basis points from a year ago. Kaplan attributes part of that move to the premium.

Diesel Adds a Second Risk Premium

Kaplan highlighted a second factor: the risk that the Iran war keeps diesel prices elevated for much longer than anticipated. He said diesel costs are already spreading into 30 or 40 items.

He also noted that Ukrainian strikes have left roughly half of Russia's refineries offline or damaged. Melissa Brown, global head of investment decision research at SimCorp, told TheStreet that the Fed has little control over supply-side inflation.

Nevertheless, Kaplan would skip an October rate hike and revisit the decision in December. He said that aligns with New York Fed President John Williams, whose comments cooled expectations for an October rate hike.

In contrast, Kaplan doubts the bond market has correctly interpreted the Fed.

"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.