The consensus view heading into this year was that the Federal Reserve’s next move would be a cut. Treasury market rate hikes are now what the bond market is pricing instead, and the shift has been both rapid and broad across the yield curve.
On Friday the 2-year Treasury yield rose by 12 basis points to 4.17%, its highest level since February 2025, when it was travelling in the opposite direction and markets were still anticipating further easing. Since the end of February alone, the 2-year yield has climbed 79 basis points, according to Wolf Richter at Wolf Street. It now sits 54 basis points above the Effective Federal Funds Rate. That gap is not noise; it is the bond market’s running estimate of where policy rates need to go.
What the Jobs Report Confirmed
The immediate trigger on Friday was the jobs report. Three consecutive months of substantial job growth, combined with upward revisions to the prior two months, pushed the three-month average to its highest level since March 2024. A labour market this resilient gives the Fed precisely the cover it needs to make inflation the overriding concern, rather than treating it as a second-order inconvenience beneath growth worries.
The inflation picture itself was already uncomfortable before Friday’s data. Both the CPI and the Fed-favoured PCE price index are expected to show consumer price inflation above 4% in May, double the Fed’s stated target, and inflation has now been running above that target for over five years. Richter notes that price pressures were building for months before the energy shock of March even arrived, and have since spread beyond energy into other parts of the economy. Calling this transitory, or suggesting the Fed can simply “look through” it, has become a harder sell with each successive data point.
Treasury Market Rate Hikes and the FOMC Fracture
What makes the bond market’s message harder to ignore is that it is now echoed inside the Fed itself. At the most recent Federal Open Market Committee meeting, the FOMC voted to hold its benchmark rate in the 3.5%-3.75% target range, but the decision drew four dissenting “no” votes, the most at any single meeting since 1992, according to CNBC. That level of internal resistance is not routine procedural friction; it indicates a committee whose consensus is under genuine strain.
The fracture extends further. Fed Governor Christopher Waller has aligned himself with the group of recent dissenters, agreeing that the central bank should remove the “easing bias” from its policy outlook and open the door explicitly to a rate increase, Reuters reports. That is a material shift in language. An easing bias, even a vestigial one, acts as a kind of soft forward guidance; dropping it would signal that the Fed’s next move is genuinely uncertain in direction, not merely in timing.
Against this backdrop, Kevin Warsh, the Fed’s 11th chair, faces a particular institutional challenge. The Treasury market is already pricing rate hikes as the likely outcome later this year. If Warsh cannot first persuade a majority of voting FOMC members that a cut is unwarranted, and then later that a hike is necessary, the bond market will do the tightening itself through higher long-end yields.
The Long End Is Already Restless
The 3-year Treasury yield mirrored the 2-year on Friday, also rising 12 basis points to 4.22%, up 81 basis points since the end of February and 59 basis points above the EFFR. Further out the curve, the 30-year yield crossed back above 5% on Friday, after holding just below that level for over a week. It reached 5.19% on 19 May. The 10-year yield closed at 4.55%, up 8 basis points.
At 4.55%, the 10-year yield is arguably too low for the environment it is being asked to price. The bond market appears to be buying, at least partially, the story that long-term inflation will revert toward 2.5% over a decade. The arithmetic of that assumption deserves scrutiny. Getting a ten-year average down to 2.5% while allowing inflation to run at 4% or above in the near term requires a very sharp fall, on a schedule the bond market cannot yet see.
The longer-term concern is structural rather than cyclical. Treasury debt is growing at over $2 trillion a year. If the policy choice is to run the economy hot, accepting higher nominal growth, faster wage growth and elevated inflation as a strategy for managing the debt burden, then the long-end yields implied by that choice are higher than where the 10-year sits today. The 6-month Treasury yield, at 3.80% on Friday, sits 18 basis points above the EFFR, pointing to an initial rate hike later this year rather than next. The bond market is not merely forecasting; it is applying pressure. The Fed’s response to that pressure is now the central question for fixed income.
