The consensus view holds that the Federal Reserve will find some reason to hold rates steady for the rest of the year. The US Treasury yield rate hike signals now accumulating across the curve make that position increasingly difficult to defend with a straight face.
What the Yield Curve Is Actually Saying About Rate Hikes
The 2-year Treasury yield jumped by 12 basis points on Friday, to 4.17%, its highest level since February 2025, according to Wolf Street. At that earlier high, the market was pricing in rate cuts, three of which duly arrived. The direction has now reversed entirely. Since the end of February, the 2-year yield has risen by 79 basis points, moving from pricing in cuts to pricing in multiple rate hikes. It now sits 54 basis points above the Effective Federal Funds Rate, the overnight rate the Fed targets with its policy tools.
The 3-year yield matched that Friday move, also rising 12 basis points to 4.22%, its own highest reading since February 2025, and up 81 basis points since the end of February. It sits 59 basis points above the EFFR. The 6-month Treasury yield, which tends to reflect bond market expectations of Fed policy over the following three to five months, rose to 3.80%, some 18 basis points above the EFFR. That positioning points to an initial rate hike coming later this year, not next.
Friday’s trigger was a jobs report that showed three consecutive months of substantial employment gains, including upward revisions to the prior two months, with the three-month average at its highest level since March 2024. A resilient labour market removes one of the Fed’s remaining excuses to sit on its hands.
Inflation Above 4%: The Number the Bond Market Cannot Look Through
Both the CPI and the Fed’s preferred PCE price index are expected to show inflation running above 4% in May, double the Fed’s stated target and above that target for more than five years. Inflation had been rising for months before an energy shock in March added further pressure, and has since spread beyond energy into other parts of the economy. CBS News reports that the PCE is expected to show April inflation rose at an annualised rate of 3.9%, which would mark the highest reading for that gauge since May 2023.
That same CBS News report notes that, according to CME FedWatch, there is now a 40% probability of a rate hike at the December meeting, up from just 3% at the June meeting. That is not a rounding error in the probability distribution. That is a wholesale repricing of the policy path in a matter of weeks.
The FOMC minutes from the most recent meeting add texture. According to CNBC, a majority of Fed officials at that meeting anticipated that rate increases would be necessary if the Iran war continued to aggravate inflation. The same meeting produced four dissenting votes, the most since 1992. The internal disagreement is unusually visible for an institution that prizes consensus.
The consensus narrative credits newly minted Fed chair Warsh with the ability to hold a coalition together around patience. The minutes suggest that coalition is already under strain, and the bond market is not waiting for him to resolve it.
The Long End: Where the Real Pressure Accumulates
Shorter maturities reflect rate expectations. The long end reflects something harder to manage: structural doubt about fiscal trajectory. The 30-year Treasury yield crossed back above 5% on Friday, having hovered just below that level for over a week. It touched 5.19% on 19 May. Wolf Street describes an imaginary trend line connecting a series of higher lows over the past year, a yield-yo-yo narrowing in range but drifting in one direction.
The 10-year yield rose 8 basis points to 4.55% at Friday’s close. The Wolf Street analysis argues this level is not high for the current inflationary environment, and may actually be low. The bond market is still, if only half-heartedly, buying the story that long-term inflation will settle back towards 2.5%, at which point a 10-year yield in the current range would be roughly appropriate. The arithmetic here is uncomfortable: achieving a 10-year average of 2.5% while current inflation is permitted to run above 4% requires sharp disinflation at some point, the timing and mechanism for which is not specified by either the Fed or the Treasury.
Wolf Street frames the broader problem as twofold: a tacit acceptance that inflation in the 3-4% range, or higher, will be tolerated, requiring yields to rise to stay sufficiently above it; and a growing concern that Treasury debt growing at over $2 trillion a year is not a trajectory that ends in price stability. The bond market’s unease on both counts is visible in the data. A December Fed meeting that was, weeks ago, priced as a near-certainty for no action now carries a 40% probability of a hike, and the direction of travel on that number has been one-way.
