Rate hike expectations surge! Traders bet the probability of Fed rate hike before October rises to 50%, U.S. Treasury yields soar

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U.S. Treasury bonds fell on Friday as bond traders increased their bets on a Fed rate hike, with the probability of a rate hike by October rising to 50%. Media reports say the market is concerned that if the Middle East conflict persists, it may drive up global inflation.

On Friday, the $31 trillion U.S. Treasury market saw a wave of sell-offs, with yields rising across all maturities by 9 to 13 basis points, led by the two-year Treasury note. The two-year Treasury is most sensitive to monetary policy. The five-year Treasury yield broke above 4% for the first time since July, and the benchmark 10-year Treasury yield surged over 11 basis points to 4.375%, reaching its highest level since August.

Money markets increased the odds of a Fed rate hike this year to 50% by October, abandoning previous expectations before the outbreak of the Iran conflict on February 28—when markets expected two rate cuts of 25 basis points each this year.

Gennadiy Goldberg, Head of U.S. Rates Strategy at TD Securities, stated:

"As the Iran conflict continues to escalate and drag on, the U.S. Treasury market seems to be starting to worry that inflationary pressures will further increase."

"The market is no longer pricing in rate cuts in 2026, and is now beginning to price in some probability of rate hikes, which is driving Treasury yields sharply higher."

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