The Treasury market is now pricing in Treasury market rate hikes, not cuts, and the data behind that shift is more uncomfortable than the headline yield moves suggest. On Friday, the 2-year Treasury yield jumped 12 basis points to 4.17%, its highest level since February 2025. Back then, the direction of travel was down, with the market anticipating further rate cuts. The market has since reversed course entirely.
Since the end of February, the 2-year yield has risen by 79 basis points, according to Wolf Street. It now sits 54 basis points above the Effective Federal Funds Rate. The 3-year yield moved by the same 12 basis points on Friday, to 4.22%, up 81 basis points over the same period and 59 basis points above the EFFR. Higher yields mean lower prices; existing bondholders are taking losses.
What the Jobs Report Triggered
The immediate catalyst was Friday’s jobs report. Three consecutive months of substantial job growth, with upward revisions to the prior two months, pushed the three-month average to its highest level since March 2024. A resilient labour market removes one of the Fed’s main reasons to delay action on inflation. With employment not in need of support, inflation can move to the very top of the worry list.
And inflation is not a minor worry. Both the CPI and the Fed’s preferred PCE price index are likely to show inflation above 4% in May, double the Fed’s 2% target and above that target for more than five years. That trajectory was in place before the energy shock in March; it has since spread beyond energy into other areas of the economy. The 6-month Treasury yield, which reflects bond market expectations for Fed policy over the next three to five months, rose to 3.80% on Friday, 18 basis points above the EFFR, a sign the market is pricing an initial rate hike for later this year, not next year.
Warsh Walks Into a Divided House
The political dimension of all this is underappreciated in the consensus coverage, which has largely framed the Treasury market rate hikes story as a future problem for the Fed to manage calmly. It is not calm. According to Chase.com, four of the 12 FOMC voting members dissented at the April meeting, the most divided the committee has been since 1992. That is the institution Kevin Warsh now chairs.
Warsh will preside over his first FOMC meeting on 16–17 June, according to Raymond James. He does so with inflation running at levels the bond market clearly finds unacceptable, a committee that is already fractious, and a predecessor who has not left the building. Jerome Powell remains at the Fed after his term as chairman ended, the first time that has happened in approximately 80 years, Raymond James notes. Whatever its institutional logic, that arrangement does not simplify Warsh’s task.
Chase.com also reports that the April CPI rose 3.8% year on year, a three-year high, up from 3.3% in March. If May’s reading comes in at or above that level (which the report analysis suggests is plausible) the CPI inflation rate could exceed even the 3-year Treasury yield. Real yields, in that scenario, are still negative at several maturities. That is not a picture of a market that feels the Fed is ahead of this problem.
The Long End Is the Real Signal
Short-dated yields are doing the urgent signalling. But the long end of the curve is where the more structural concern lives. The 30-year Treasury yield rose back above 5% on Friday, after hovering just below that level for over a week. On 19 May it had hit 5.19%. The yield has oscillated around the 5% mark since early April, but the pattern of higher lows is tightening, suggesting the bond market is becoming more, not less, convinced about the direction of travel.
The 10-year yield closed Friday at 4.55%, up 8 basis points on the day. At that level, given that both the Fed and the government appear to have accepted higher nominal growth, faster wage growth and elevated inflation as tools for managing the national debt (which is growing at more than $2 trillion per year) a 10-year yield near 4.55% may not be compensation enough. To reach a 10-year average inflation rate of 2.5% while allowing inflation to run above 4% in the near term requires either a sharp and sustained disinflation later, or a bond market that decides it has been too patient. The Treasury market rate hikes now being demanded by the short end suggest that patience is running out, and Warsh’s first meeting on 16–17 June will be his first real test of whether he can bring a fractured FOMC with him.
