The US Treasury yield curve flattens as markets bet on "higher for longer" rates under Walsh's leadership.

```

The inflation shock triggered by the US-Iran war is reshaping the market's expectations for the Federal Reserve's policy path.

During Tuesday's session, the spread between 5-year and 30-year US Treasury yields narrowed to around 81 basis points, marking the lowest since May 2025.

Meanwhile, current trader pricing shows the Federal Reserve is almost certain to start raising interest rates before December, a sharp reversal from the two rate cuts expected by the market prior to the outbreak of the US-Iran conflict.

Investors increasingly believe the US-Iran war has triggered the largest inflation shock since 2023, forcing many officials to abandon their previous dovish stance, and the Federal Reserve will have to tighten monetary policy this year.

Although expectations for US-Iran peace talks rose on Monday with a corresponding drop in oil prices, Steven Major, global macro advisor at Dubai Brokerage, stated:

There are too many things for the bond market to worry about; the conflict in this region is just part of the story. The bond market is far from stable and is becoming somewhat unpredictable, which also explains why yields remain elevated.

Chen at Brandywine also emphasized that the structural factors weighing on the bond market will not dissipate just because of a brief easing in geopolitical tension. Investors need to remain alert to a persistently high interest rate environment.

Behind Curve Flattening: Short End Under Pressure, Long End Relatively Stable

The core logic of yield curve flattening lies in the divergent trends of the short and long ends.

The 5-year US Treasury yield climbed to a yearly high of 4.35% last week, closing at 4.26% on Friday; the benchmark 10-year yield was at 4.56%; the 30-year yield fell from a yearly peak of about 5.20% to 5.06%, in part due to a recent decline in oil prices.

(Main US Treasury yields by maturity last week)

The spread between 2-year and 30-year yields also narrowed to its lowest since July. Nomura Senior Strategist Andrew Ticehurst noted:

Both data and politics are reducing pressure for rate cuts, with short-end yields rising and repricing.

He added that Trump's statement about letting Walsh "act independently" also contributed to this trend.

Markets Live strategist Garfield Reynolds pointed out, The global acceleration of inflation means the Fed and other major central banks will maintain hawkish stances, suppressing the short end, while the long end could be relatively supported as signs of severe hits to global economic growth prospects gradually emerge.

Officials and Wall Street: Rate Hikes No Longer a Small Probability

The change in policy officials’ rhetoric is reinforcing market pricing for rate hikes.

WallstreetCN mentioned that on May 22nd last Friday, Fed Governor Waller delivered a hawkish speech, clearly stating inflation is the "driving force" for future policy decisions, and said future rate hikes and cuts are "fifty-fifty," which immediately drove expectations for rate hikes sharply upward.

Mainstream Wall Street institutions are also synchronously adjusting their views. JPMorgan CEO Dimon warned that rates could rise further, significantly.

According to Bloomberg, strategists at ING, Goldman Sachs, and Barclays believe: Even if inflation pressures driven by oil prices ease, rises in long-end yields are unlikely to fully recede; the large-scale public debt burden and structural effects from the AI investment boom will continue to ferment.

Brandywine portfolio manager Tracy Chen said in a Bloomberg TV interview that so-called "bond vigilantes" are warning that central banks have fallen behind the curve. She estimated:

Even with some easing in oil prices, I don’t believe the structural sell-off in developed market bonds will end here.

She believes the 10-year yield could eventually rise to 5%, and some maturities may even hit 5.5% to 6% for a period of time, driven by loose fiscal policy, large-scale spending on defense and AI infrastructure, population aging, and geopolitical turbulence.

Risk Warning and DisclaimerThe market carries risk, and investments should be made cautiously. This article does not constitute personal investment advice nor considers the specific investment objectives, financial situation, or needs of individual users. Users should consider whether the opinions, views, or conclusions herein suit their particular circumstances. Invest accordingly at your own risk. ```