Bond Market Just Flipped to “Rate Hike in July” as 2-Month Treasury Yield Spiked by 13 Basis Points

Warsh scuttled forward guidance, markets are on their own. However this comes out, it promises to be a rougher ride, but in a fresh breeze. By Wolf Richter for WOLF STREET. So would a “surprise rate hike” at the July meeting still be a surprise when the bond market prices it in a week in advance? Treasury yields rose across the board today. At the long end, fears of inflation and separate fears of an onslaught of new debt reigned: The 10-year Treasury yield rose to 4.71%, the 20-year yield to 5.20%, and the 30-year yield to 5.17%, the latter two near multi-year highs. But what was really fascinating was the bond market’s reaction with the yield that primarily reflects what will happen at the FOMC meeting on July 28-29: the 2-month yield. The 2-month Treasury yield spiked by 13 basis points today and by 15 basis points during the week to close at 3.95%, according to Treasury Department’s yield calculation. This is at the upper end of the Fed’s target range after it hikes by 25 basis points, which would bring its target range to 3.75%-4.0%. And it is 32 basis points above the Effective Federal Funds Rate (EFFR, blue), which the Fed targets with its policy rates. This is a stunning move, pricing in a “surprise” rate hike at the FOMC meeting next week. Buyers of securities that mature in about two months today demanded to be paid for the rest of a rate hike at the July meeting that hadn’t already been priced in before today. A mid-September rate hike doesn’t matter to them because their securities will mature by then. The 2-month Treasury yield had also spiked in June 2025 during the Debt Ceiling standoff when the bond market wasn’t sure if the securities that matured in July and August 2025 could be redeemed on maturity date, as the government’s checking account, the Treasury General Account, would be running on empty by then, and it couldn’t sell any new debt to raise new funds, and might run out of money, and they wanted to be paid extra to take that risk. After the Debt Ceiling was resolved on July 4, 2025, and the Treasury Department began selling Treasury bills successfully by the train-load to raise the funds needed to stay in business and to replenish its checking account, the 2-month yield settled back down. The 3-month Treasury yield, which rose by 6 basis points today and by 10 basis points during the week, also to 3.95%, according to Treasury Department data, also prices in a rate hike. But its window includes the September FOMC meeting, and so a rate hike either at the July meeting or at the September meeting would be priced in, but not two rate hikes. This is a new era at the Fed. Warsh has scuttled forward guidance. He has been silent about rate hikes but adamant about inflation being too high, and about the Fed having some work to do. Other FOMC members have spoken in favor of rate hikes. The participants in the Treasury market are now left to their own devices, they can no longer look at the Fed for guidance, they have to dig through and digest the data on their own – and as Warsh said, the huge bond market is very good at it – and they have to come up with their own conclusions as to the yield they want to be paid to buy these securities. Warsh said that the Fed would use the bond market’s signals as one of the key inputs in the Fed’s monetary policy decisions. So today, the bond market provided the signal. The Fed hasn’t sprung a true “surprise” rate hike on the markets in eons, maybe not since 1994 under Greenspan, an intermeeting rate hike at that, and it started a tightening cycle. Warsh has taken Greenspan as a model, in terms of reducing communications, leaving markets to their own devices without forward guidance, and prioritizing the price stability mandate over the employment mandate. There is a chance the bond market is getting it wrong, or that the Fed will be ignoring the signals from the bond market and not hike in July, or that the bond market will change its mind tomorrow and walk back those rate hike expectations. However this comes out, it promises to be a rougher ride, but in a fresh breeze. Enjoy reading WOLF STREET and want to support it? You can donate. I appreciate it immensely. Click on the mug to find out how: The pressure gauges are on ‘max pressure’, in the red zone. Btw: for the last few weeks, when I open your website, a small box pops up which would allow one to opt out of cookies, or set cookie preferences. The several times I have clicked on that box/button the button (prompt) proves to be a dummy /useless button. ☹️. Nothing happens! “Right-click” on the link, as it says in that box. Then choose “open link in new tab,” then go to that tab, scroll down, and uncheck what you don’t want. Done. Warsh is a paper tiger. I’ll believe it when I see it. Read the article, not your imagination. This is the bond market talking, not Warsh. Warsh is precisely NOT talking. Your article says “Warsh is adamant about inflation being too high.” Did Warsh actually say that or did you imagine it? I agree with Ross- I will believe in this purported anti-inflation conviction only after the fed takes serious action to lower it. 1. He said that multiple times in similar ways: — in his testimony before Congress, Warsh said: “We’ve all looked around and we’ve seen that prices are too high…” and: “My colleagues and I recognize that high inflation has been an undue burden on American households and businesses. The members of our committee have no tolerance for persistently elevated inflation, and we share a resolute commitment to restore price stability.” The way Reuters summarized the testimony: “In congressional testimony last week, Warsh reiterated his view that inflation was too high….” — at the last FOMC press conference, Wash said: “Persistently high prices are a burden for the American people. But the recent past need not be prologue. I am pleased to report that members of the FOMC are unambiguous and unanimous. This committee will deliver price stability.” 2. What you and Ross think the Fed will do is irrelevant to the article. The article was about the bond market’s reaction, not your or Ross’s reaction. Neither one of you read the article. If you don’t read the article, don’t comment on the topic of the article. Commenting guideline #1 Thank you Wolf I was pleased to see a nice bump in next weeks 4 week auction Is it odd or normal how close the 20 and 30 year bonds yields are even though the 30 year is 50% longer? If I recall, liquidity is limited on the 20 year, but I am still surprised to see such a narrow spread. When the 20-year was re-introduced in 2020, the spread to the 30-year yield was 25 basis points. And everyone expected the spread to narrow over time as more 20-year bonds would be issued every month, and it did narrow, and now the spread is down to just a few basis points, so that’s good progress, though it’s still higher. Wolf, It might be pretty interesting to see how much of the vast US Federal Debt matures at various points (1 yr out, 5 yrs out, 10 yrs, 20…) 1) I know the blended average maturity is probably easier to get and present but I think there may be some value in having a graph with the X values being at various specific #s of years out. 2) I know the Fed can just print money-to-buy-Treasuries to get whatever interest rate levels it wants (at the now very-very-very-explicit cost of USD deflation/US inflation) – but the *timing* of inevitable future re-funding/rollover crises is important. 3) I know that DC is pathologically incapable of keeping the Debt number from increasing year-after-fricking-year (why break a 56 year streak…why not engorge the already grotesque “defense budget”) so that any map of maturities will soon be out of date…but still, I think there is value in estimating the timeline of national ruin It’s the only free lunch one can get in the treasuries market: Less duration risk with more yield. That said, I’m with Jamie Dimon and would NOT be purchasing bond duration ahead of a rising inflation / rising rates environment. We’re in 2021 all over again. better get those fingers going we’re gonna need lots more FRAUDULENT debt to pay for everything A rate hike in July may not get enough attention. There is however an 82% chance of one in September. What will oil prices be in September? A bit off subject Wolf, but as you may recall we share many similarities, we both met our spoused in France, there was self induced “waiting period” before we reconnected halfway around the world! I finally bought “Big Like” just picked it up @ the PO & read 130pgs @ one go…I couldn’t put it down…don’t know why I waited so long! A great book, thanks for sharing! ❤️ I saw the same thing today. This was a big move relative to the normal ups and downs across all maturities. And really big moves for the bills. Wow! I am starting to warm to Warsh’s approach. The Fed need to listen and observe. Talk less. I just would like to be a fly on the wall in the White House to hear Trump’s temper tantrum if they hike rates next week. Fireworks! “it promises to be a rougher ride, but in a fresh breeze.”….is this TM’d? 🤣❤️ That would be one more reason to get sued. Bond vigilantes finally stirring from a guidance-induced slumber? Wiping the sleep from their eyes and then panicking because they don’t recognize the room they’re waking up in? “Bond vigilantes”… LOL! No such thing. Not yet… Let me describe the room: -Inflation is at double the mandate and rising -Tariffs and oil wars are doing all they can to push prices up -USD is worth a tenth less than it was 19 months ago -The rotating voting membership of the FOMC has tilted toward the most dovish members, there’s nobody but doves in the room -The FOMC has cut off most communication and is just sitting in the corner of the room completely neutralized -FOMC chair KevWar seems to have made a deal with the devil to get his job, and the deal involves using committees to stall the necessary rate hikes until we’re beyond the midterms, while not communicating when they will arrive. And there the vigilantes sit, with a 30-year timebomb bond on their hands. Do they click sell? Yes they do. Let’s include AI tech inflation. Chips, electricity, etc. And “ vigilantes sit” in the station, waiting to see what is coming down the track, “by the train-load.” 🤔 “Do they click sell?” It depends on who “they” are. An intelligent individual would of course sell, but if these are central banks that are colluding to control/pacify their respective people/governments, probably not. How much 30-year paper is being held by The Fed itself? Are they simply following the Japanese model? If so, then the Fed and the bond market are irrelevant. Interesting times. “And there the vigilantes sit, with a 30-year timebomb bond on their hands. Do they click sell? Yes they do.” What stands out to me is that the 2-month and 3-month charts in the article seem to be saying the vigilantes think those T-bills are timebombs too on a short fuse, not just the T-notes and -bonds. Is there a “sell everything” button that they’re mashing? @WB: interesting times indeed. “Treasury yields rose across the board today. ” And to further refine my own thinking-out-loud, I realized I’ve fallen out of the habit of checking the yield curve. Looking at it now compared to May, yup, the curve is being pushed up. But not uniformly so it’s shape is changing too. Very, very interesting times. RISK continues to be repriced globally. Hedge accordingly. Hopefully the new FED chair has a new trick up his sleeve and can spring it on us when needed. Ten percent interest rates are needed, but not liked. A recession is needed, but not liked. Hopefully, we do not go broke in the next few years, but I would not bet on it. Letting the bond market dictate rates is easier than the political liability of actually endorsing rate hikes. Maybe it would be better to just let rates be market driven. There is nothing disinflationary on the horizon so it will be interesting to see what the FED does. Seems there is also no good news on the horizon in terms of the ME conflict which appears to be globally inflationary at least. The euphemistically named “forward guidance” was just a central planning tool. Made the FED even less nimble (if that is even possible) It is actually a massive change to scrap it. Good riddance. “Warsh has taken Greenspan as a model, in terms of reducing communications, leaving markets to their own devices without forward guidance, and prioritizing the price stability mandate over the employment mandate.” Maybe, at least this is what he claims. Let’s see what The Fed actually does AND what happens to their balance sheet. Greenspan paid attention to the gold price, will Warsh? I hope you are correct Wolf and Warsh does indeed act like Greenspan. Time will tell. MW: The bond market hasn’t been this calm since the dot-com bust and the financial crisis. History warns of a rude awakening. If the Bond market and the FOMC are independent of each other, why would Warsh have to make a comment? I think he is being prudent staying quiet. I appreciate these articles because they assure me that laddering short term t-bills is still the most prudent path for me. Consider switching to a TIPS ladder. The implied inflation built into their prices is far too low. MW: The 30-year Treasury yield is closing in on 5.2%. A surge to 6% could slam stocks. In some ways it already is. The S&P500 and Nasdaq100 are slow-bleeding, while the Asian indices are heading toward full corrections. Government policy has been on a roller coaster the past couple of years, and so have bond rates. The latest Iran war and the latest trade war could end by social media post tomorrow, and all the insiders will have once again profited from the news followers. Very interesting comments. I just looked at a chart of world govt bonds, updated. Yes. chart called World Govt Bonds. I cannot count the number of times I have read on this site….in the comment section…. people saying despite all the issues (and I paraphrase) “We are still the cleanest dirty shirt in the laundry” with reference to the strength of the dollar as a reserve currency and the bond rate/bond sales. With the US AA+ rating the bank rate is still much higher than many other countries with AAA ratings managing a lower bank interest rate spread for consumers. The blurb went on to say: The U.S. holds an Investopedia explanation of U.S. Credit Ratings AA+ rating from agencies like S&P and Fitch due to mounting government debt, persistent fiscal deficits, and repeated political gridlock over the debt ceiling. The structural deficit, debt ceiling showdowns, and almost virtual deadlock on most issues is not sustainable. Add in tariff whimsy, income inequality, no serious consultation, and a war hovering on the brink of catastrophe (impact on world trade) and blatant corruption in the higher levels of government one could assume rate hikes are unavoidable going forward. I cannot imagine investors locking in for long term returns in this environment. 6% might look high today, but in 30 years? Stocks? Got preps? RESUME QT. Who’s on the fence? Warsh said “inflation is a choice” correct? Surely his tough talk/committee setup/removing forward guidance means there is going to be a HIKE right? If not why? Otherwise he is just another B.S. artist IMO. How many times this close to an FOMC meeting is the probability of a hike >38% ? It’s normally 1-2% or 98%. No Fed chair can dictate monetary policy. For there to be a hike or a cut or no change, a majority of the 12 FOMC members has to vote for it, and the chair is only 1 of those 12 votes, and he’s got to round up at least 6 additional votes that vote with him among the the remaining 11 FOMC members. That’s the problem EVERY chair has had. They’re not dictators. They have to build a majority.