The yield on the 30-year U.S. Treasury note touched 5.16% on May 18, a new intraday high since October 2023, just shy of its highest level since the 2007 global financial crisis. Unlike the long-standing expectation of a "hidden central bank bailout," this surge in long-term bond yields reflects a fundamental market shift—investors are reassessing the bond market without emergency intervention from the Federal Reserve.

The key variable contributing to this escalation is the impending transfer of power at the Federal Reserve. On May 13, the U.S. Senate formally confirmed Kevin Warsh as the next chairman of the Federal Reserve, succeeding Jerome Powell for a four-year term, by a vote of 54 to 45. Powell's term as chairman ended on May 15, and he is currently serving as interim chairman. Warsh will be sworn in on May 22 by President Trump, officially taking office at the Federal Reserve.

The return of an anti-bond-buying chairman

Warsh served as a Federal Reserve Governor from 2006 to 2011, and was deeply involved in key decisions regarding the 2008 financial crisis. Early in his career, he was known for his hawkish policy stance. He publicly opposed the Fed's bond purchases for a long time, and resigned from his governorship in 2011 due to disagreements with the mainstream opinion within the Fed regarding balance sheet expansion.

At his Senate nomination hearing on April 21, Warsh stated unequivocally, "We will work with the Treasury Secretary to find a way to shrink the size of the balance sheet." The market widely interpreted this as a clear signal that the era of quantitative easing was coming to an end.

The Federal Reserve's current balance sheet is approximately $6.7 trillion, down from its peak of about $9 trillion in 2022, but it has continued to grow slowly recently to maintain ample bank reserves. Warsh's long-term goal is more aggressive; he has publicly stated his desire to shrink the balance sheet to around $3 trillion, equivalent to a 50% reduction from its current level. If Warsh's position were implemented, it would mean the substantial disappearance of the safety net that has long supported the ultra-long-term bond market since the 2008 financial crisis.

The 30-year US Treasury yield has risen above 5.15%.

The main drivers of the surge in US long-term Treasury borrowing costs in 2026 are now clear: the ongoing geopolitical conflict with Iran, the transmission of energy price shocks to the overall inflation chain, repeated inflation data exceeding expectations, and the self-reinforcing expectation of rising interest rates.

Since the US-Israeli attacks on Iran in late February, the yield on 30-year US Treasury bonds has risen by more than 50 basis points, reaching an intraday high of 5.16% on May 18. The yields on 10-year and 2-year US Treasury bonds also reached 4.63% and 4.10% respectively, both hitting their highest levels since February 2025. As of May 19, the yield on 30-year US Treasury bonds remained at approximately 5.13%, very close to its all-time high since 2007.

On the inflation front, the core PCE price index, favored by the Federal Reserve, rose 3.2% year-on-year in March, reaching its highest level since November 2023; the overall PCE rose even more sharply, by 3.5% year-on-year. The Fed's 2% inflation target is becoming increasingly distant. The ripple effects of the energy price shock are spreading to a wider range of goods and services—data from the American Automobile Association shows that the average price of gasoline across the United States has exceeded $4.53 per gallon.

The bond market is pricing in early. Alarms are sounding across the entire $30 trillion U.S. Treasury market: the 2-year Treasury yield has broken through 4%, reaching the upper limit of the Federal Reserve's policy rate target range of 3.50% to 3.75%; the CME Group's FedWatch tool shows that the probability of a Fed rate hike in early December is close to 40%, while the probability of a rate cut is less than 2%.

Revaluation of profitability after safety net collapse

The direct impact of quantitative easing on long-term Treasury yields has been a subject of debate in academic and investment circles. However, most investors at least agree on one point: a key reason why the term premium of US long-term Treasury bonds has remained at historically low levels or even in negative territory for so long is that the Federal Reserve, through large-scale asset purchases, has effectively acted as the "last resort" in the bond market. This implicit safety net has objectively reduced the risk compensation that investors demand for holding long-term Treasury bonds.

If Warsh, upon taking office, no longer supports further purchases of long-term bonds with maturities of 10 years or more, the ultra-long-term bond sector will lose the effective safety net it has enjoyed since the 2008 financial crisis, even in the face of new market shocks or crises. This will fundamentally change the pricing logic of the bond market.

Against this backdrop, coupled with a deteriorating fiscal outlook and rising expectations for long-term neutral interest rates, Barclays strategists have provided a specific figure: a 5.5% yield on 30-year Treasury bonds "does not seem out of reach," which would be the highest level since 2004.

Editor's Summary

With Walsh set to take over as Federal Reserve Chairman, his hawkish stance on the balance sheet is fundamentally altering pricing expectations in the bond market. The 30-year Treasury yield has broken through 5.15%, and Barclays warns it could rise further to 5.5%—the highest level since 2004. The next move of the Fed's $6.7 trillion balance sheet, and the market's self-regulating mechanism after the loss of expectations of a "central bank bailout," will be key variables determining the trajectory of the global fixed-income market over the next 12 months. BlackRock's research division has recommended reducing exposure to developed-market government bonds; this risk aversion signal warrants close attention.

Frequently Asked Questions

Question 1: What is Kevin Warsh's true attitude toward the Federal Reserve's balance sheet?

Warsh has long opposed the Federal Reserve's large-scale bond purchases and resigned as a Fed governor in 2011 for this reason. In a 2025 Wall Street Journal article, he suggested that the balance sheet could be reduced by about $2.5 trillion; this is interpreted as his long-term goal being to reduce the current $6.7 trillion balance sheet to around $3 trillion, almost a "halving".

Question 2: Where did the $6.7 trillion balance sheet come from? Is its size normal?

When Warsh joined the Federal Reserve Board of Governors in 2006, the Fed's balance sheet was only about $800 billion. Following the 2008 financial crisis, the Fed launched quantitative easing (QE), causing the balance sheet to expand rapidly. The COVID-19 pandemic in 2020 led to another large-scale expansion, reaching a peak of approximately $9 trillion in 2022. After a period of contraction, the balance sheet has now decreased to about $6.7 trillion. However, former Fed officials believe that the size of the balance sheet is closely linked to banks' liquidity needs, and that "anyone who reminisces about the good old days of $800 billion is completely unrealistic."

Question 3: What does it mean that the 30-year US Treasury yield has broken through 5.15%?

On May 18, the yield on 30-year US Treasury bonds touched 5.16%, the highest level since October 2023, just shy of a new high since the 2007 global financial crisis. Bond traders typically regard 5% as a psychological barrier for 30-year Treasury bonds; breaking through this level signifies a substantial upward shift in market expectations for pricing long-term borrowing costs. The head of US interest rate strategy at BNP Paribas bluntly stated, "Above the 5% mark, the market has completely lost its anchor."

Question 4: Why couldn't Walsh start shrinking the table immediately after taking office?

The reduction of the balance sheet faces at least four practical constraints: First, long-term interest rates in the United States are already rising, and further contraction of the balance sheet could push up borrowing costs; second, the Congressional Budget Office projects a federal fiscal deficit of 5.8% in 2026, and the government's huge demand for debt issuance directly offsets Warsh's intention to reduce the balance sheet; third, shrinking the balance sheet requires reforming the banking regulatory framework to lower reserve requirements, a move that former Chicago Fed President Charles Evans called "an ambitious project comparable to the Manhattan Project"; and fourth, Warsh supported quantitative easing after resigning in 2011, only becoming a critic after the plan became "indefinite," and his actual stance needs further verification after he takes office.

Question 5: How does this surge in US Treasury yields differ from the period before the 2007 financial crisis?

The core difference lies in the structure of market expectations. Before 2007, the bond market did not rely on regular central bank intervention. After the 2008 financial crisis, quantitative easing (QE) was implemented multiple times, including large-scale bond purchases during the 2020 pandemic, leading investors to gradually develop a path dependency on the expectation that the Federal Reserve would ultimately provide a safety net. Warsh's impending appointment to the Federal Reserve means that this implicit safety net may substantially disappear, forcing the market to reprice the real risk premium required to hold long-term Treasury bonds. Furthermore, current driving factors are more diversified—Middle East geopolitical conflicts are pushing up energy prices, the US fiscal deficit is continuing to expand, and productivity changes brought about by artificial intelligence are pushing up expectations for neutral interest rates. These factors combined make the rise in long-term yields more structurally driven.