The hawk Fed Chair who broke the bond market?

Kevin Warsh may be the most hawkish Federal Reserve chair since Paul Volcker.

That’s a compliment in some circles.

It’s also a warning.

Volcker beat inflation, but he broke things on the way, and the bond market is now finding out what Warsh might break.

Thirty-year Treasury yields have climbed to their highest level since 2002.

In September alone, the 10-year yield jumped more than half a percentage point, to about 5.3%.

It was the worst month for U.S. government bonds in four years.

The usual explanations don’t hold up for these movements.

Technical market dynamics that impact demand may include, for example, a modest slackening in the so-called basis trade (with hedge funds buying fewer Treasurys in support of leveraged bets).

Some observers point to an assumed increase in the “term premium” – the extra yield supposedly needed to offset duration risk for holders of longer-term bonds.

Other theories are even more esoteric and/or difficult to measure.

There might be an “absorption premium” – an academic suggestion – said to boost the yield for reasons too abstruse to summarize easily.

But technical factors seem insufficient to account for a shift of such magnitude in a $40 trillion market.

They may play some small role but they are not the drivers of this tectonic regime change.