The US Treasury market is undergoing a violent repricing. On Monday, the benchmark 10-year Treasury yield briefly broke above 4.76%, its highest level since January 2025. The 5-year yield rose to levels last seen in early 2025, while the 30-year yield climbed roughly 5 basis points on the day to around 5.26%. Meanwhile, fed funds futures showed the market-implied probability of a Federal Reserve rate hike in September surging to 64%, up from roughly 35% before Warsh's speech last Friday.
The selloff was not triggered by a single event. The weekend's sharp escalation in US-Iran military conflict drove a powerful rebound in international oil prices, with Brent crude briefly topping $90 a barrel and gaining nearly 4% intraday. WTI crude rose more than 4% before pulling back to around $85.50. The surge in energy prices reignited fears of an inflation resurgence — and it came just days after Fed Chair Kevin Warsh delivered an unmistakably hawkish message at the Jackson Hole symposium.
The combined effect flipped market positioning within a single trading session, from "pricing in rate cuts" to "pricing in rate hikes."
Warsh Sets a Hawkish Tone, Rate Path Takes a Sharp Turn
Warsh's speech at the Jackson Hole symposium last Friday served as the core catalyst for this round of market turmoil. He explicitly emphasized that price stability is the Federal Reserve's core mandate and reaffirmed that the 2% inflation target is non-negotiable. According to the Fed's official transcript, the personal consumption expenditures (PCE) price index is currently running at 3.7% year-over-year, with a six-month annualized pace of 4.1% — both well above the 2% target. Warsh stated bluntly that the Fed "bears direct responsibility for 65 consecutive months of elevated inflation," noting that 54% of PCE basket components have risen more than 3% over the past 12 months (compared with a post-pandemic peak of 77% and a pre-pandemic norm of just 32%). Markets quickly interpreted the remarks as decidedly hawkish — especially after the July FOMC meeting already produced dissenting votes in favor of tightening. The Fed held rates steady for a fifth consecutive meeting in July by a 9-3 vote, with the three dissents coming from Cleveland Fed President Beth Hammack, Minneapolis Fed President Neel Kashkari, and Dallas Fed President Lorie Logan, all of whom favored further tightening. Investors began a wholesale reassessment of the Fed's policy path for the remainder of the year.
The policy-sensitive 2-year Treasury yield surged roughly 11.8 basis points on Friday alone, dipped briefly early Monday, then resumed its climb to around 4.337%. More notably, the market's focus has shifted entirely from "Will the Fed cut in September?" to "Will the Fed hike in September?"
According to Reuters, fed funds futures pricing shows the probability of a September rate hike has surged to 64%, up from roughly 35% before Warsh's speech. The magnitude of this repricing was so significant that economists at Barclays and Société Générale have begun incorporating September and December rate hikes into their forecasts — scenarios previously excluded from their baseline outlooks.
Sean Simko, head of fixed income portfolio management at SEI Investments, said the Fed is prepared to act if necessary. If the labor market remains stable and inflation stays elevated, the Fed could lean toward a hike at the September 16 policy meeting (the current fed funds target range is 3.50% to 3.75%).
Whether this expectation holds, however, ultimately depends on incoming economic data. The August nonfarm payrolls report is due this Friday, and August CPI data will be released on September 11. These two releases correspond to the Fed's dual mandate of employment and price stability, and will directly determine the final market pricing ahead of the September meeting.
Long-End Pressure Goes Beyond the Fed
If the 2-year yield primarily reflects policy expectations, the persistent rise in 10-year and 30-year yields reveals deeper structural issues.
The 30-year yield continued to climb, though it remains some distance from the multi-year high set in mid-August. The US Treasury Department had previously announced an expansion of long-term bond buybacks to improve market liquidity and valuations in the relevant maturities, which helped temporarily push the 30-year yield lower. This means the current pressure on long-end Treasuries cannot be attributed entirely to Federal Reserve monetary policy.
On one hand, the US fiscal deficit and Treasury supply remain unavoidable structural challenges for the long end of the curve. On the other, investors' growing demand for a higher term premium to hold long-duration Treasuries continues to push 10-year and 30-year yields higher.
Mark Spindel, chief investment officer at Potomac River Capital, noted that future bond supply deserves particular attention, including the corporate bond market. September is traditionally a peak issuance month for US investment-grade corporate debt, and the additional supply could further absorb market liquidity — while the inflation outlook has not meaningfully improved.
The Treasury market is effectively facing simultaneous pressure from a more hawkish Fed, elevated inflation risks, government bond supply, and corporate bond issuance.
Global Bond Markets Under Sympathetic Pressure
The rise in US Treasury yields has quickly spilled over into global bond markets. According to The Wall Street Journal, Germany's 10-year bund yield rose to 3.313% on Monday, its highest since 2011. Japan's 2-year government bond yield climbed to a 31-year high, while Germany's 2-year yield reached its highest level since July 2024.
This underscores that global bond markets are not facing a singular "Fed trade." Rising energy prices have rekindled global inflation risks, rate-cut expectations across major central banks are broadly being suppressed, and the combination of fiscal expansion and increased sovereign bond supply is exerting upward pressure on long-term yields across the board.
In equity markets, Asian stocks came under broad pressure on Monday. South Korea's KOSPI index fell more than 3% intraday before pension fund buying in the final minutes of trading narrowed the decline to roughly 0.1%. Roy Lim, an equities sales trader at Samsung Securities, said pension funds net bought approximately ₩120 billion (approximately $87.8 million) of KOSPI stocks in the final 20 minutes of trading, concentrated primarily in technology names. The MSCI Asia Pacific Index fell 0.7%, while European equity futures and Nasdaq 100 futures pointed to further declines.
Gold fell to around $4,437 per ounce, and bitcoin slid to approximately $77,500. The yen strengthened modestly to around 159.77 per dollar.
The Next Test: Jobs and Inflation Data
The real question the market must answer is whether this rise in Treasury yields represents a temporary adjustment driven by geopolitical and policy-expectation shocks, or the beginning of a new, higher rate regime.
In the near term, the answer largely depends on Friday's US employment data. If the labor market remains resilient and inflation data shows no meaningful cooling, Warsh's hawkish signal could be validated by the economic data, leaving room for the probability of a September hike to rise further and Treasury yields to continue searching for a new equilibrium level.
Conversely, if the labor market deteriorates markedly, the market may once again question whether the Fed can hike rates amid mounting growth pressures.
Meanwhile, long-end Treasuries also face a short-term technical factor: month-end index rebalancing. Because the US Treasury issued a substantial amount of 10- to 30-year debt in August, these bonds will be added to bond indices at month-end, potentially generating passive buying that could partially cushion further upside in long-end yields.
But from a longer-term perspective, an increasingly clear question now confronts investors: if inflation fails to return to 2% and US fiscal financing needs remain persistently elevated, is a 10-year Treasury yield around 4.75% still "high" — or is it the new normal?
Oil prices, Warsh, and the upcoming employment and inflation data are together forcing this question to the forefront.
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