From rate cuts to rate hikes! The bond market has undergone a historic shift in expectations for the Federal Reserve's policy trajectory.

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The global bond market is undergoing a profound reconstruction of expectations. Impacted by the Bank of England’s hawkish shift, traders have completely priced out the possibility of a Fed rate cut in 2026, and some investors have even begun to hedge against the scenario of rate hikes in the next few months.

The Bank of England’s Monetary Policy Committee unanimously voted on Thursday to keep rates unchanged, while warning it is “ready to act at any time” to counter inflation risks arising from the war in the Middle East.

This wording triggered a domino effect—UK gilts were sold off, with the two-year UK gilt yield surging over 35 basis points in a single day to 4.46%, European bond markets followed suit, and the pressure spilled over to the US Treasury market. The two-year US Treasury yield immediately rose by 11 basis points to 3.89%.

Meanwhile, US Department of Labor’s weekly initial jobless claims unexpectedly fell, further weakening the Fed’s basis for maintaining an accommodative stance. The swap market has now withdrawn all expectations for Fed easing this year, and US Treasury futures trading volume has jumped significantly along with rising yields.

Bank of England’s hawkish turn triggers global bond market repricing

Less than three weeks ago, the market widely expected the Bank of England to announce a rate cut at this meeting due to persistent weakness in the UK labor market at the time. However, circumstances changed rapidly. Brent crude broke above $118 a barrel on Thursday, and as economies reliant on energy imports, Europe and the UK face particularly prominent imported inflation pressures.

Bank of England Governor Andrew Bailey made it clear in his statement that monetary policy must “respond to the risk of more persistent impacts on UK CPI inflation.” The swap market has now priced in three rate hikes by the Bank of England this year, each of 25 basis points, with the first expected as soon as next month.

Principal Asset Management Chief Global Strategist Seema Shah said, “The Monetary Policy Committee was forced into a rapid shift. Even the member with the most dovish stance, Swati Dhingra, voted to keep rates unchanged, which shows the central bank’s heightened vigilance against inflation.”

LB Macro SA CEO and founder Luigi Buttiglione pointed out, “The market was clearly too complacent and still fantasized about a central bank more concerned with output than inflation. But for a Bank of England with an inflation-targeting mandate, this doesn’t align with its operating DNA when facing a supply shock.”

Fed rate hike hedge positions emerge, policy path expectations suddenly tighten

Fed Chair Powell said after Wednesday’s rate decision that further lowering borrowing costs will depend on the inflation trajectory, with wording now noticeably cautious.

Mischler Financial Group Managing Director Tom di Galoma said, “It’s all driven by the Bank of England rate decision. The market is now pricing in a 50 basis-point rate hike in 2026. European bond markets are in free fall, which in turn is pushing up US Treasury yields.”

He also noted the current liquidity pattern in the market is “almost no buying and selling dominates everything,” with market sentiment constrained by expectations for prolonged conflict. “The prevailing view is the Iran war may last months, not weeks.”

The US Department of Labor’s newly released weekly initial jobless claims unexpectedly dropped further, powering the bond market sell-off. Strong labor market data shows the US economy may no longer need low rates to support employment, and the swap market has immediately priced out any form of Fed easing this year.

Characteristics of this round of global bond market adjustment: Middle East conflict pushes up energy prices, energy prices reinforce inflation expectations, inflation expectations force central banks into tightening, which in turn triggers systematic repricing of interest rate-sensitive assets. In just a few weeks, the market narrative has shifted from “when to cut rates” to “whether to raise rates,” and the speed and magnitude of this shift have exceeded previous expectations.

Risk Warning and DisclaimerThe market involves risks, investments require caution. This article does not constitute personal investment advice, nor does it take into account the special investment objectives, financial status, or needs of individual users. Users should consider whether any opinions, views or conclusions in this article are suitable for their particular situation. Invest accordingly, at your own risk. ```