I suppose Kevin Warsh and Scott Bessent, if not Donald Trump, got what they were after this week.

US equities rallied on Thursday following what was widely viewed as a credibility-enhancing rate hike from the Fed, with a caveat to account for the fact that you shouldn’t get credit for doing the bare minimum.

I won’t dwell too long on that latter point, but suffice to say Warsh didn’t do anything on Wednesday beyond what was necessary to prevent the long-end of the Treasury curve from running even further away from Bessent.

The notion that Warsh “proved” something about his inflation-fighting bona fides and sincerity of intention with regard to Fed independence by delivering a 25bps hike that was 90% priced by the market is obviously (and completely) laughable.

Nevertheless, Thursday’s bond rally — which was aided by reports that Tehran got the Beijing shoulder tap vis à vis the Houthis’ increasingly brazen full-court press against Saudi-backed forces in Yemen and their benefactors in Riyadh — brought meaningful relief to investors.

According to sources who spoke to Reuters, MBS turned to Xi Jinping for help following the Houthis’ lightning advance that saw the group seize two coastal towns and a key island in the Bab al-Mandab Strait last week. China’s private messages to the IRGC “went further than public statements call[ing] for restraint, dialogue and the restoration of safe navigation,” the linked article said, adding that Xi asked Iran to “use its influence with the Houthis to help prevent the conflict spreading further across energy routes.”

“The interpretation is that China might be flinching a bit at the recent magnitude of the price shock,” Nomura’s Charlie McElligott, who earlier this week suggested China might be in on it as a way to pressure Trump ahead of the US mid-terms, said. It’s possible, he wrote, that things went “too far, too fast,” as tends to happen when you green light Iran’s proxies. The figure below shows the sharp drop in Shanghai crude.

Concurrent declines for Brent helped ease upward pressure on long-end developed market bond yields, which also got an assist from the BoE’s plan to stop actively selling long-dated gilts.

Thursday’s Treasury rally “was consistent with the drop in crude and growing confidence in the Fed’s inflation-fighting credibility,” BMO’s US rates team remarked, noting that breakevens and inflation swaps “collapsed for the second consecutive session.”

“The constructive tone for duration is a welcome development for those of us in the market who have been medium-term bullish even as the recent selloff implied that a regime-shift could be unfolding,” the bank’s Ian Lyngen and Vail Hartman said.

It’s also “a welcome development” for equity bulls in light of the peril associated with rapid increases in 10-year US yields. “As we say on repeat here, ‘all assets are short rate vol’ and ‘bonds don’t work as a risk-asset hedge’ in this type of persistent ‘above-trend inflation’ environment,” McElligott went on.

The scatter plot above, from Charlie’s note, is useful. It shows the (very) long history of the two-year rolling correlation of one-week changes in S&P returns and 10-year yields.

The message is clear, and McElligott spelled it out: When 10-year yields are 5.25% and above, the correlation between yields and equity returns is positive, which is to say stocks and bonds tend to move in the same direction, rallying and selling off together.

Any additional escalation in rates “is gonna see UST losses amplify equities losses for the balanced / 60-40 crowd,” Charlie wrote. That’s why it’s so crucial that oil comes off the proverbial boil, and why not hiking rates on Wednesday to anchor the long-end of the US Treasury curve was a total non-starter for Warsh.

It’s possible Trump was apprised of the latter, and that his “You might as well vote with the board because it’s not going to matter” remark amounted to a tacit, grudging acknowledgement not merely of Warsh’s predicament on the Committee, but of the combustible situation at the long-end of the Treasury curve.