Interest rates remain one of the primary concerns for investors as Kevin Warsh has officially assumed leadership at the U.S. Federal Reserve (Fed). While we believe the possibility of a rate cut has diminished considerably, we are not yet expecting additional rate hikes. In our view, Warsh is likely to chair the board independently and pragmatically in an environment that would make it difficult to justify easing policy while inflation remains elevated. At the same time, we do not anticipate an aggressive tightening stance. Instead, the new Fed Chair may adopt a patient, “wait and see” approach as he evaluates incoming economic data and evolving market conditions.
Our view stems from recent remarks from Warsh reinforcing this perspective, particularly his references to the policies of former Federal Reserve Chair Alan Greenspan, whom he has openly admired. Greenspan generally favored a measured and incremental approach to monetary policy while maintaining strong respect for the independence of the Fed. A hallmark of that era was the belief that monetary policy works with long and variable lags, meaning changes in interest rates take time to filter through the economy. Remaining steady and deliberate can help policymakers avoid overreacting and potentially overtightening financial conditions. If Warsh ultimately follows this Greenspan-style philosophy, it is possible the Fed leaves short-term interest rates unchanged for the remainder of the year, which is our base case scenario.
One of the largest risks facing the bond market, however, remains persistent inflation expectations. Just six months ago, investors were concerned that an accommodative Fed Chair might lower rates even while inflation remained above the Fed’s long-term target of 2%. Such a scenario would likely have fueled additional inflationary pressures and caused longer-term yields to rise despite lower short-term policy rates. While lower short-term rates may support shorter-duration bonds, they can create meaningful headwinds for longer-duration fixed income investments.
In our opinion, the war in Iran and the resulting rise in oil prices have significantly reduced the likelihood of a near-term rate cut. Energy shocks have historically complicated the Fed’s inflation outlook, and elevated oil prices can quickly feed into broader inflation expectations. However, even if tensions ease and oil prices decline, inflation expectations may remain stubbornly elevated.
One important measure to monitor is the 10-year Treasury Inflation-Protected Securities (TIPS) breakeven inflation rate, which remains elevated in the mid-2% range. Breakevens represent the market’s implied expectation for average inflation over the next decade and suggest investors still anticipate inflation running above the Fed’s long-term target.
Persistent inflation expectations can place upward pressure on long-term yields even when economic growth moderates.
At the same time, markets may be repricing term premiums higher after more than a decade of unusually suppressed yields. Investors increasingly appear to be demanding greater compensation for risks tied to inflation volatility, fiscal policy uncertainty, and geopolitical instability. This repricing could keep longer-term interest rates elevated even if the economy begins to slow or the Fed eventually shifts toward easing.
Longer-duration bonds also face pressure from the growing supply of Treasury issuance needed to finance expanding federal deficits. Meanwhile, traditional sources of demand have become less reliable. The Fed is no longer a consistent buyer through quantitative easing programs, and foreign demand from major holders, such as China and Japan, has moderated. This imbalance between supply and demand may continue to place upward pressure on long-term Treasury yields.
In this environment, the yield curve could steepen even if the Fed eventually lowers short-term rates. Historically, easing cycles have not always resulted in lower long-duration yields, particularly during periods when inflation concerns and fiscal pressures dominate investor sentiment. The fixed income environment remains unusually complex, with inflation expectations, fiscal dynamics, geopolitical risks, and shifting Fed leadership all contributing to heightened uncertainty. As a result, active fixed income management can become increasingly important. The bond market is highly fragmented across sectors, credit quality, duration ranges, and security structures with varying opportunities and risks depending on where investors are positioned along the yield curve. In periods where volatility, inflation expectations, and supply-demand dynamics are changing rapidly, passive approaches may struggle to adapt effectively. We believe maintaining flexibility and actively managing duration and sector exposure will remain critical for navigating today’s evolving bond market landscape.
About Shelton Capital Management
Shelton Capital Management (Shelton) is a boutique investment firm that helps investors pursue their financial goals through tailored investment solutions and human-centric customer service. Founded in 1985, the company provides mutual funds, ETFs, ETF-based portfolios and separately managed accounts to the clients of wealth managers, retirement plan advisors, and individual investors. As of May 31, 2026, the firm manages more than $7 billion in assets across fixed income portfolios, U.S. equity and international equity strategies, ESG solutions, and equity income products leveraging our expertise in options. Over the decades, Shelton has collected awards from established sources such as Morningstar, Lipper, Forbes Advisor, and Pension & Investments. The company continues to add key employee talent and expand their institutional expertise. Shelton is headquartered in Denver, Colorado with additional offices in Memphis and San Francisco. For more information, visit www.sheltoncap.com.
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