By Karishma Vanjani

At the European Central Bank gathering, new Federal Reserve Chairman Kevin Warsh pointed to a wave of positive market reactions as proof that investors get his vision.

But Warsh failed to mention one part of the bond market that has been acting wonky lately: the yield curve, which graphs the amount by which longer-dated Treasury yields exceed shorter-dated ones.

It is narrowing toward a point where it typically signals an economic downturn might be ahead. Warsh's silence on the indicator doesn't mean he doesn't see it; he may have simply chosen not to mention it. But it deserves investors' attention.

From the get-go, Warsh has made it clear: There will now be less signaling about the future from the Fed, a shift that critics argue makes the central bank's approach to policymaking less clear.

"So I hear this as if people don't understand. I think they actually understand quite well," Warsh said at a gathering of policymakers in Portugal on Wednesday morning.

Evidence lies in a range of markets, including the bond market, where people that make decisions, or the "triggers pullers," have pushed down yields and volatility, he said.

From the first time Warsh made the case for less Fed speak on June 17, the 10-year Treasury yield has fallen 0.042 percentage points through Tuesday close — the day before Warsh's statement at ECB. The 30-year yield is down 0.024 percentage points.

Lower yields — the rate the U.S. pays to bondholders — are good news in an environment where inflation is over double the Federal Reserve's 2% target. It suggests that investors expect the Fed to reign in prices and are demanding less compensation on bonds.

MOVE index, a measure of bond volatility, has held slightly above 70 over the same period, a sign investors aren't expecting sharp swings in interest rates.

Adding to Warsh's early success is the so-called term premium, an estimate of the extra yield investors demand to stash away money for a decade in a 10-year bond, rather than repeatedly invest into short-term securities, such as one-month Treasury bills, for 10 years. It's sitting at its lowest point since April 7, 2025.

Less uncertainty due to progress in ending the U.S.-Iran war could have pushed down that premium. Plus, Warsh's statements, "which can broadly be described as orthodox, have helped ease nerves around the fed funds outlook and Fed independence," Capital Economics Senior Market Economist James Reilly wrote.

Inflation expectations are dropping, meaning investors perceive the Fed to take a strong stance on price stability. The bond market's expectation of average inflation over a five-year period is down by 0.050 percentage points since June 17 through Tuesday.

As for the yield curve, an unusual situation has been brewing lately where the gap has been narrowing quickly, threatening an inversion — a situation where investors get higher yield on a shorter-dated debt than longer-dated one.

On June 24, a U.S. debt maturing in 10-years yielded only 0.264 percentage points more than the debt maturing in 2 years, the narrowest since March 18, 2025, according to the Dow Jones Market Data

"Be prepared for a US yield curve inversion," Head of Macro Strategy at TS Lombard Daniel Von Ahlen titled his June 30 note.

Typically, an inversion says a recession is looming. And although that warning isn't perfectly accurate, an inversion can have an impact on risky assets and push banks to tighten credit standards as they start earning less from their long-term loans.

"We don't expect a recession. But at the margin, they will be a headwind to risky assets and are one reason why we expect the S&P 500 to tumble to 6,500 by the end of next year," Reilly wrote.

Write to Karishma Vanjani at karishma.vanjani@dowjones.com

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