Kevin Warsh’s Fed Begins
The End of the “Easy Money” Era
A Fresh Look at U.S. Long-Term Treasury Covered Call ETFs
Last week, the market’s attention was focused on the first FOMC meeting under new Federal Reserve Chair Kevin Warsh. In the monetary policy statement, language suggesting an accommodative stance was removed, and Chair Warsh did not participate in the expected dot plot on policy rates. Forward guidance, which usually offers clues about the future direction of monetary policy, was omitted, while his commitment to price stability was made clear.
Coincidentally, on the 22nd, former Fed Chair Alan Greenspan—who had long been criticized for laying the groundwork for the 2008 financial crisis through overly accommodative monetary policy—passed away. Many now say that the belief in the so-called “Fed put,” the idea that the U.S. central bank would step in with rate cuts and liquidity whenever asset prices fell, has effectively disappeared.
Volatility in the stock market has increased, while the prices of gold, commodities, and Bitcoin have declined. Some argue that this marks a major paradigm shift: the end of the “easy money” era that, since the global financial crisis, had come to define the so-called New Normal.
Debate over Kevin Warsh’s policy stance—despite being nominated by President Trump, who has advocated for rate cuts—has continued even after his first FOMC meeting. One thing is clear, however: Warsh has long been critical of the second round of quantitative easing announced at the November 2010 FOMC meeting, widely seen as the beginning of the easy-money era. At the time, as a Fed governor, he voted in favor of Bernanke’s QE policy at the FOMC out of concern over divisions within the institution. Yet he also published an op-ed in The Wall Street Journal arguing that quantitative easing was ineffective in solving structural problems and could instead create side effects. He resigned from the Fed Board in March 2011.
The market reaction is worth noting. Since Warsh was nominated as the new Fed Chair at the end of January this year, U.S. Treasury yields—especially at the short end—have been rising. By contrast, yields on 10-year and 20-year-plus long-term Treasuries have risen much more slowly. In other words, the yield spread between long-term and short-term Treasuries has been narrowing.
Short-term Treasury yields reflect the expected path of monetary policy, while long-term yields reflect expectations about future economic conditions. Current short-term yields are incorporating inflation concerns, while long-term Treasury yields suggest that the future economy may struggle to improve meaningfully from current levels. If short-term yields continue to rise while long-term yields trend downward, resulting in an inversion where short-term yields exceed long-term yields, that could be interpreted as a signal of recession.
The investment implication is that U.S. long-term Treasury covered call products deserve renewed attention. If long-term Treasury yields enter a sustained downtrend, then straightforward long-duration Treasury investing may be effective. But if long-term yields move sideways without a clear trend, a strategy of selling call options to earn income may be worth considering. At this stage, short-term rates linked to policy expectations may still rise, while long-term rates may struggle to establish a clear direction.
In fact, looking at the one-month returns of U.S. long-term Treasury covered call ETFs, SOL U.S. 30-Year Treasury Covered Call (Synthetic) (473330) returned 4.27%, RISE U.S. 30-Year Treasury Covered Call (Synthetic) (472830) returned 5.20%, and TIGER U.S. 30-Year Treasury Covered Call Active (H) (476550) returned 2.08%. These returns exclude monthly distributions of around 0.8%.
As stock market volatility rises, investors may also begin to question concentrated equity exposure even in long-term growth themes such as AI. When a shift in monetary policy is expected, it may be time to revisit a more traditional investment approach: rather than relying excessively on concentrated stock positions, allocate part of the portfolio to bond-based assets as well.
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