Jerome Powell's term as Fed Chair officially ended last Friday. He'll continue in the role until the new Fed Chair, Kevin Warsh, is sworn in this coming Friday. 

But the bond market is already pricing a regime change.

German 10-year Bund yields broke out to 15-year highs at 3.19%. UK 10-year Gilt yields hit 18-year highs at 5.20%. The U.S. 10-year traded as high as 4.63% today — the highest level since days before Trump was sworn into office last year.

Remember, the Warsh doctrine is smaller balance sheet, lower rates ("AI is going to make everything cost less"), and true structural reform – to break the entanglement of the Fed with government financing.

If we listen to what Warsh has been saying since the summer of last year (when Trump began to turn the screws on Powell and Warsh's name emerged as the Trump candidate), the days of the Fed backstopping bad fiscal policy and bad corporate behavior, via quantitative easing, should be over.

The fiscal dominance that's been funded by the Fed for the better part of the past 18 years should give way to fiscal discipline (with crisis management given back to the Treasury).  

In this regime, the distortion of markets and outcomes created by QE is over. That should ultimately be good for dollar assets, good for the reserve currency status of the dollar.

So why are rates moving up?

Because the structural change under Warsh removes the Fed's thumb from the scales.

Powell's Fed manipulated outcomes through QE (outright buying assets) and through its "forward guidance" (shaping market opinion with words and forecasts, to create outcomes the Fed wanted). 

This new Fed regime is about less manipulation, less telegraphing, less Fed demand for long-dated Treasuries, more dissent and more volatility.

With that, the bond market is figuring out where yields should be, without the Fed's thumb on the scales. Even if this Fed regime and the Treasury strike an accord to restore fiscal discipline, the bond market will doubt it, until proven otherwise.

Now, the biggest change under Warsh will be the Fed's role on the international stage. The era of global coordinated central banking, led by the Fed, is likely over.

For fifteen years, the Fed has been the implicit backstop for sovereign debt fragility — not just in the United States, but globally. Through dollar swap lines. Through emergency asset purchase programs.

With Warsh (with the Trump-led Fed) that backstop is now conditional.

That's why European rates are breaking out to highs not seen since the most intense days of the global financial crisis.