The 10-year US Treasury yield hit a near 20-month high, with Warsh's hawkish stance and a rebound in oil prices leading to a reassessment of interest rate hike expectations.

The sell-off in the US Treasury market intensified further.

On Monday, March 31 (Eastern Time), the benchmark 10-year Treasury yield rose above 4.76%, reaching its highest level since January 2025. The 5-year Treasury yield also rose to its highest level since early 2025, while the 30-year yield rose about 5 basis points to around 5.26% during the day.

Amid rising US Treasury yields across the board, international crude oil futures rebounded on Monday following the military conflict between the US and Iran that erupted over the weekend. Brent crude briefly climbed back above the $90 mark, rising nearly 4% on the day, while WTI crude rose more than 4%, as market concerns intensified regarding a rebound in inflation and the Federal Reserve's renewed interest rate hikes.

This round of US Treasury bond sell-offs is not solely driven by geopolitics. Last Friday, Federal Reserve Chairman Warsh delivered a clearly hawkish signal at the Jackson Hole symposium, emphasizing that price stability is the Fed's core responsibility, prompting the market to significantly raise its expectations for a September rate hike. On Monday, federal funds futures pricing showed that the probability of a Fed rate hike in September had risen to approximately 64%, far higher than the approximately 35% before Warsh's speech.

Against this backdrop, the renewed surge in oil prices has undoubtedly reinforced the market's "inflation + interest rate hike" trade. Meanwhile, the US will release its August jobs report this week and August consumer price data on September 11th; these two sets of data will be key variables in determining the Fed's policy direction in September.

Oil prices rise again, and US Treasury bonds are facing an "inflation shock".

Monday's jump in U.S. Treasury yields was primarily driven by rising energy prices.

As the military conflict between the US and Iran escalated again, markets were concerned about further risks to energy supplies in the Strait of Hormuz and the Middle East. Brent crude oil rose above $90 at one point, and WTI crude oil also rose significantly. Later that day, WTI rose about 2.5% to around $85.5, and Brent rose about 2.5% to around $90.3.

For the bond market, the biggest problem with rising oil prices is not the energy cost itself, but the potential for it to push up inflation again.

For some time now, a key basis for expectations of Federal Reserve rate cuts has been the gradual decline in inflation. However, if oil prices remain high due to geopolitical factors, the prices of gasoline, transportation, and other goods and services may be affected, forcing the market to reassess the path of inflation decline.

Therefore, Monday's trading logic was quite straightforward: rising oil prices → increased inflation risks → improved prospects for Fed rate hikes → upward shift in short-term interest rate expectations → pressure on the entire US Treasury yield curve.

Sean Simko, head of fixed income investment management at SEI Investments, said the Federal Reserve is prepared to act if necessary. If the job market remains stable and inflation continues to be high, the Fed may be inclined to raise interest rates at its policy meeting on September 16.

Warsh's hawkish rhetoric has not yet subsided, and the probability of a September rate hike has risen to 64%.

Oil prices merely ignited market concerns about inflation; the real catalyst to change the direction of interest rate trading came from Warsh's Jackson Hole speech last Friday.

In his speech, Warsh emphasized that the Federal Reserve must prioritize restoring price stability and reiterated its 2% inflation target. The market interpreted this statement as distinctly hawkish, especially after dissenting votes supporting a rate hike emerged at the July meeting, prompting investors to reassess the Fed's policy path for the remainder of the year.

The yield on the policy-sensitive 2-year US Treasury note surged by about 11.8 basis points on Friday, and although it initially fell back in early trading on Monday, it subsequently rose again to around 4.337%.

More notably, the market is no longer just discussing "whether there will be an interest rate cut in September," but has started trading "whether there will be an interest rate hike in September."

According to Reuters, federal funds futures showed the probability of a September rate hike rose to 64% on Monday, up from about 35% before Warsh's speech. Warsh's remarks even prompted economists at Barclays and Société Générale to begin predicting September and December rate hikes that were not previously included in their baseline scenarios.

In other words, the market is undergoing a rapid repricing of the interest rate path: from expecting the Fed to cut rates to worrying about the Fed raising rates again.

However, whether this expectation can be sustained ultimately depends on the data. The August non-farm payroll report will be released this Friday, while the August CPI will be released on September 11. These two data points correspond to the Fed's dual goals of employment and inflation, respectively, and will therefore directly determine the final pricing before the September 16 meeting.

Long-term bonds face another pressure: supply and term premium.

If the 2-year yield mainly reflects the Federal Reserve's policy expectations, then the continued rise in the 10-year and 30-year Treasury yields indicates that market concerns have spread to longer maturities.

On Monday, the 10-year yield touched 4.764%, the highest since January 2025; the 30-year yield rose about 5 basis points to around 5.26%.

It's worth noting that while the 30-year yield continues to rise, it remains some distance from the multi-year high reached in mid-August. Previously, the U.S. Treasury announced an expansion of long-term Treasury bond repurchase agreements to improve market liquidity and valuations of related bonds, which initially helped to suppress the 30-year yield.

This means that the current pressure on long-term US Treasury bonds cannot be entirely attributed to the Federal Reserve.

On the one hand, the US fiscal deficit and the supply of Treasury bonds remain unavoidable structural problems for the long-term bond market; on the other hand, investors' tendency to demand higher term premiums for holding long-term US Treasuries may also become an important factor driving up 10-year and 30-year yields.

Mark Spindel, chief investment officer at Potomac River Capital, said that future bond supply, including the corporate bond market, is particularly noteworthy. September is traditionally a peak season for U.S. investment-grade corporate bond issuance, and the new supply could further absorb market funds, while the inflation outlook has not improved significantly.

Therefore, the current US Treasury market is actually facing multiple pressures from "a more hawkish Fed, rising inflation risks, increased government bond supply, and increased corporate bond supply."

Not just in the US: Global long-term bond yields rise in tandem.

The impact of rising US Treasury yields has also spread to the global bond market.

The Wall Street Journal reported that the yield on German 10-year government bonds rose to 3.313% on Monday, a new high since 2011. The yield on Japanese 2-year government bonds also rose to its highest level in 31 years, while the yield on German 2-year bonds rose to its highest level since July 2024.

This indicates that the current global bond market is not facing a single "Federal Reserve trade".

Rising energy prices have reignited global inflation risks, while expectations of interest rate cuts by central banks in major economies have been suppressed. Coupled with fiscal expansion and increased government bond supply, long-term bond yields are facing upward pressure overall.

For the United States, the 10-year Treasury yield breaking through 4.75% is particularly noteworthy—it not only means a further increase in financing costs, but also that the long-term capital costs of the US government, businesses, and residents will be affected.

The next hurdle for the bond market: Can employment and CPI halt this round of yield increases?

What the market really needs to observe next is whether this round of rising US Treasury yields is a temporary adjustment driven by geopolitical and policy expectations, or the beginning of a new round of upward shift in the interest rate center.

In the short term, the answer largely depends on the US jobs data this Friday.

If the job market remains resilient and inflation data does not show a significant cooling, then Warsh's hawkish signals may be validated by economic data, and the probability of a Fed rate hike in September may further increase, while US Treasury yields may continue to rise in search of a new equilibrium level.

Conversely, if the job market deteriorates significantly, the market may again question whether the Federal Reserve can raise interest rates given the pressure on economic growth. This concern has already emerged in the market: if August employment data again shows a significant cooling of the labor market, it could force the Federal Reserve to postpone rate hikes.

At the same time, long-term US Treasury bonds also face short-term disturbances due to month-end index rebalancing. As the US Treasury issued a relatively large amount of 10- to 30-year Treasury bonds in August, these bonds will be included in the bond index at the end of the month, potentially generating some passive buying and thus mitigating further upward pressure on long-term yields to some extent.

However, from a longer-term perspective, the market is facing an increasingly clear problem:

If inflation fails to return to 2% and the US fiscal financing needs remain high, is the 10-year US Treasury yield of around 4.75% still high, or is it the new interest rate center?

Currently, oil prices, the Walsh study, and upcoming employment and inflation data are all bringing this issue back to the forefront for investors.

Risk warning and disclaimerInvesting involves risk; please exercise caution. This article does not constitute personal investment advice and does not take into account the specific investment objectives, financial situation, or needs of individual users. Users should consider whether any opinions, views, or conclusions in this article are suitable for their specific circumstances. Any investment decisions made based on this information are at your own risk.