US Treasury prices rebounded, and the market chose to "temporarily believe" Warsh.

Warsh withstood pressure from Trump to cut interest rates and instead raised rates to demonstrate the Fed's determination to control inflation—this time, the market chose to believe him.

The Federal Reserve's resumption of interest rate hikes after a three-year hiatus has temporarily eased tensions in the US Treasury market. On Thursday, the yield on the 10-year US Treasury note fell to 4.97%, ending an eight-day winning streak; the two-year yield also fell 3 basis points to 4.70%, a decline from the 2024 high reached on Wednesday.

The market had already fully priced in this rate hike; what truly worried investors was whether the Federal Reserve would hold off on raising rates. If the rate hike failed to materialize, doubts about the Fed's resolve to control inflation could resurface, further impacting the bond market. With the rate hike now implemented, this tail risk has temporarily subsided, and US Treasury yields have subsequently fallen.

Meanwhile, global bond markets continue to face pressure. This week, the average yield on global government bonds rose to its highest level since 2007, as tensions in the Middle East pushed up oil prices, further reinforcing inflation expectations. The pressure on bond markets has extended from US monetary policy to broader factors such as inflation and fiscal supply.

With the interest rate hike now implemented, the market is beginning to believe in Warsh's hawkish approach.

“The Fed has no choice but to raise interest rates, or it will face an even larger bond sell-off,” said Byron Anderson, head of fixed income at Laffer Tengler Investments.

Olumide Owolabi, senior portfolio manager at Neuberger Berman, believes that the market is currently pricing in a larger rate hike than the Fed itself has predicted, and that interest rates are likely to stabilize at high levels. "We expect interest rates to stabilize at their current high levels and will increase duration allocations as opportunities arise."

Warsh's remarks reinforced market expectations for further policy tightening. The Fed's preferred inflation gauge, the PCE, came in at 3.7% in July, near its highest level since 2023 and significantly above the long-term target of 2%. Warsh stated that the summer inflation data has not yet shown a substantial improvement in the underlying inflation trend.

The Federal Reserve's dot plot shows that the median forecast among officials is for one more rate hike this year; the interest rate swap market implies an expectation of three more rate hikes by mid-2027. While the rate hikes have eased short-term selling pressure, the market's assessment that interest rates will remain high remains unchanged.

Long-term pressures persist, and 30-year US Treasury yields face further upside risks.

While short-term interest rates are being repriced, long-term US Treasuries also face the combined impact of factors such as inflation, fiscal deficits, and the supply of Treasury bonds. Guneet Dhingra, head of US interest rate strategy at BNP Paribas, recommends shorting 30-year Treasuries with a target yield of 5.6%, arguing that the Federal Reserve will bring interest rates back into a restrictive range.

Hebe Chen, an analyst at Vantage Global Prime, said the impact of this rate hike on the bond market may not be a short-term shock. Short-term rates need to re-priced in the possibility of further tightening, while long-term rates are simultaneously constrained by inflation, large-scale debt issuance, and fiscal risks.

Therefore, Thursday's decline in US Treasury yields is more of a short-term correction following the interest rate hike, rather than a complete relief of pressure on long-term yields. As long as inflation remains high and fiscal financing needs persist, long-term yields may still face upward pressure.

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.