Federal Reserve leaves rates unchanged in the US; Warsh comments spur Treasury yield-curve steepening.

Weekly US bond market update: The Fed spoke, markets questioned

Strong tech earnings left investors feeling better about AI-related capex, while reactions to the Fed Chair’s comments after the recent FOMC meeting caused the Treasury yield curve to steepen.

The Federal Reserve left interest rates unchanged in a 9-3 decision, but Chair Kevin Warsh’s communication—not the policy decision—drove markets and triggered a sharp steepening of the Treasury yield curve.

Strong technology earnings, led by Amazon, reinforced confidence that AI demand continues to justify elevated capital spending.

The latest GDP number may have understated the US economy’s underlying strength , while resilient labor markets and easing core inflation continued to support the soft-landing narrative.

The Fed remains data dependent , with September’s decision likely to hinge on inflation, labor market data and energy prices.

Elevated yields continue to favor high-quality fixed income, with a preference for securitized assets, selective technology credit, emerging markets, and structured municipals.

An action-packed week saw economic data continue to underline the resilience of the US economy, while another strong round of technology earnings helped alleviate concerns over the sustainability of AI-related capital spending. The Federal Reserve (Fed) left policy unchanged as expected, but it was Chair Kevin Warsh’s communication—or lack thereof—that became the week’s main talking point, driving a sharp market reaction and a notable steepening of the Treasury yield curve.

Federal Reserve: Communication overshadowed the decision

As widely expected, the Fed left its policy rate unchanged at 3.50%–3.75% in a 9-3 decision, with three members dissenting in favor of a 25-basis-point rate hike—the largest number of dissents in a decade and a clear indication that concern over persistent inflation remains within the Federal Open Market Committee. Markets currently assign roughly a 60% probability of a September rate hike. While the policy decision itself contained few surprises, Chair Kevin Warsh’s press conference proved more consequential. Warsh reiterated the Fed’s unwavering commitment to returning inflation to its 2% target, but offered little clarity on the Committee’s reaction function or which economic indicators would ultimately determine the next policy move. As a result, markets interpreted his comments as less immediately hawkish. That supported the front end of the Treasury curve, while the lack of a clearly articulated policy framework increased uncertainty about the longer-term inflation outlook.

As Figure 1 illustrates, the 2s30s Treasury curve steepened aggressively during the Warsh press conference, with front-end yields declining while longer-dated yields moved higher. The move suggests investors became less concerned about an imminent rate hike but demanded a higher term premium to compensate for greater uncertainty around the longer-term inflation and policy outlook. Looking ahead, September’s decision is likely to hinge on incoming inflation and labor market data, with energy prices remaining an important swing factor.

Figure 1: The market immediately reacted to the Fed Chair’s comments with concerns about the long-term inflation and policy outlook

The spread in basis points between 2-year and 30-year Treasury yields from 7

Source: Bloomberg, Schroders, as of 8

Past trends offer no guarantees of future market conditions.

Earnings season: Fundamentals reassert themselves

Following the recent technology sell-off—driven in part by the forced deleveraging of the Situational Awareness hedge fund and renewed concerns about the sustainability of AI capital spending—last week’s earnings provided a timely reminder that fundamentals remain exceptionally strong. What initially appeared to be the start of a broader reassessment of AI valuations increasingly looks like a technically driven correction rather than a deterioration in underlying demand.

Amazon provided perhaps the clearest example. AWS revenue accelerated 37% year-over-year, its fastest growth in 18 quarters, driven by exceptionally strong cloud and AI demand. Management responded by raising 2026 capital expenditure guidance to $220 billion, while noting that customer demand continues to exceed available capacity. Similar commentary from Microsoft, Alphabet and Meta suggests the constraint remains one of supply rather than demand, reinforcing confidence that the AI investment cycle remains demand-constrained rather than capital-constrained.

The broader earnings backdrop has also remained exceptionally constructive. Underlying S&P 500 earnings are on track to grow by approximately 26% year-over-year, marking the strongest quarter for earnings growth since Q3 2021. Even excluding the Magnificent Seven, earnings are expected to increase by almost 23%, highlighting that profit growth is becoming increasingly broad-based rather than concentrated in a handful of AI beneficiaries. Encouragingly, management guidance has remained resilient despite higher interest rates, tariffs and geopolitical uncertainty. The latest earnings season suggests the market is moving beyond questioning the size of AI investment and toward recognizing the scale of AI-driven demand.

Last week’s economic data continued to reinforce the resilience of the US economy. While second-quarter GDP growth slowed to 1.5%, the underlying picture remained considerably stronger, supported by resilient consumer spending, robust business investment and healthy private domestic demand. The labor market also remains in good shape, with jobless claims remaining historically low, while recent inflation data continue to point toward gradually easing underlying price pressures as core inflation, shelter and wage growth all move in a more encouraging direction.

Looking ahead, the focus shifts to the Institute for Supply Management (ISM) Services survey, productivity and unit labor costs, weekly jobless claims and further commentary from Federal Reserve officials. Markets will be looking for confirmation that inflation continues to moderate while the labor market remains resilient—a combination that would further strengthen the soft-landing narrative and support the Fed’s patient approach.

The combination of resilient growth, gradually improving inflation and elevated yields continues to provide an attractive backdrop for fixed income investors. While longer-dated US Treasuries now offer more compelling long-term value than they have for several years, we believe the opportunity is likely to come more from attractive income than meaningful capital appreciation, with fiscal deficits, elevated Treasury issuance and higher term premiums likely to limit the scope for a sustained rally.

Credit spreads remain historically tight, although selective opportunities continue to emerge, particularly among higher-quality technology issuers benefiting from the structural AI investment cycle. We continue to favor securitized assets—including agency mortgage-backed securities (MBS) and asset-backed securities (ABS)—alongside selective emerging market debt and structured municipal opportunities, where we think valuations remain more compelling. More broadly, today’s yield environment, in our view, allows investors to build well-diversified fixed income portfolios capable of generating attractive long-term income without having to sacrifice quality or reach further down the credit spectrum.

Read the team’s latest quarterly market outlook, Fixed income markets now demand a mix of tactical offense and resilient defense.

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or Economics Group, and do not necessarily represent Schroder Investment Management North America Inc.’s house views. These views are subject to change. This information is intended to be for information purposes only and it is not intended as promotional material in any respect.

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