US Treasury Yields Near Highs, Waller Faces Test: A Single Statement May Stabilize the Bond Market

On September 9, as the U.S. fiscal deficit, inflation pressures, and the AI financing boom continue to drive up long-term financing costs, the pressure on the U.S. Treasury market has intensified. What the market is truly waiting for may not be the Federal Reserve's resumption of quantitative easing, but rather Chairman Kevin Waller's further clarification of his policy "reaction function."

Recently, global bond yields have been rising, with the 10-year U.S. Treasury yield currently around 4.80%, close to its highest level since 2025. Meanwhile, expectations for future interest rate hikes by the Federal Reserve have increased, with investors concerned that the U.S. fiscal deficit and corporate AI infrastructure financing demands will further push up long-term yields.

Waller previously stated at the Jackson Hole conference that there is still more work to be done in combating inflation, which the market interpreted as a possibility of future rate hikes. Currently, the market estimates the probability of a rate hike by the Federal Reserve next week to be about 60%. If a hike occurs, it would be the first increase in over three years.

Analysts point out that what the bond market currently lacks is a clear explanation of the Federal Reserve's "reaction function," specifically which economic indicators the Fed is monitoring, how it weighs inflation against growth risks, and what changes would prompt a policy adjustment. More explicit policy communication would help reduce investors' uncertainty regarding inflation and the path of monetary policy.

In contrast, while the Federal Reserve has a balance sheet of approximately $6.7 trillion and can influence long-term rates through quantitative easing, the market generally believes that Waller's likelihood of restarting QE is low. Waller has previously criticized large-scale asset purchases for potentially distorting wealth distribution and emphasized the importance of the Fed's independence.

Therefore, against the backdrop of rising long-term yields driven by the fiscal deficit, inflation, and the AI financing boom, the Federal Reserve's more realistic choice may not be to once again utilize its balance sheet, but rather to instill confidence in the market through clearer policy communication: that once inflation pressures persist, the Fed will take action.

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