The U.S. Treasury market is pressing Federal Reserve Chair Warsh with a clear message: hawkish rhetoric on inflation is not enough on its own, and investors want to see whether policy tightening will actually follow.
A fresh round of military conflict between the United States and Iran in July caught Wall Street off guard. International oil prices briefly moved above $100 a barrel, setting off another broad sell-off across the roughly $30 trillion Treasury market. Since the end of June, the benchmark 10-year Treasury yield has climbed by more than 30 basis points to around 4.678%, close to a 10-year high. The policy-sensitive 2-year yield also rose to about 4.328%, above the Federal Reserve’s current 3.75% upper bound, reflecting stronger expectations for a possible rate increase.
The Federal Reserve is due to announce its latest policy decision on Wednesday. According to CME FedWatch data as of last Friday, markets saw a 62% chance that rates would stay unchanged at this meeting, but the probability of a hike had jumped to about 38% from roughly 13% a week earlier.
“This shows how worried the market is about inflation, and how worried it is about whether the Fed can match words with action,” said Gennadiy Goldberg, head of U.S. rates strategy at TD Securities. He was referring to Warsh’s public comments about pushing inflation back to the 2% target.
Oil shock adds to pressure on Treasuries
The report said the U.S.-Iran conflict was the direct trigger for the latest rise in Treasury yields. Higher oil prices intensified fears that inflation could return, leading traders to dump U.S. government bonds. GasBuddy data showed U.S. retail prices for regular gasoline and diesel had recently moved back above $4 a gallon and $5.20 a gallon, respectively.
After Warsh held his first press conference as Fed chair in June, the Treasury market briefly rebounded. That move faded quickly. The 30-year Treasury yield remained stuck above 5%, dealing heavy losses to investors who had been positioned for gains in long-dated bonds.
David Rosenberg, founder and president of Rosenberg Research & Associates, wrote in a report last Friday: “We did not anticipate this latest chapter in the U.S.-Iran war, and this is a complicating factor for any duration asset at this point.” He also said continued expansion in tech-related corporate bond issuance had added strain to the Treasury market. Rosenberg said he had adjusted his portfolio by shifting from long positions in 30-year Treasuries, which had underperformed expectations, into shorter-duration U.S. government debt.
Paul Christopher, head of global investment strategy at Wells Fargo Investment Institute, said: “The Fed needs to hear this signal. Uncertainty is stacking up,” and bond investors are demanding compensation for it.
Debate grows over whether the Fed should hike
The Federal Reserve is not fully aligned internally. According to the report, some members of the rate-setting committee favor raising rates to contain inflation. The problem is timing. Any move to hike would come at a highly sensitive moment.
Inflation erodes the real value of fixed-income assets, while a rate increase would put additional downward pressure on bond prices and weigh on other financial assets, including stocks. Barclays analysts expect the U.S. fiscal deficit to reach about $2 trillion in 2026. Continued large-scale Treasury issuance is expected to be a key way to fund that gap, suggesting supply pressure in the bond market will not ease quickly.
Debt issuance from the technology sector is also adding to the strain. Large technology companies, described in the report as hyperscale cloud providers, are issuing corporate bonds to fund artificial intelligence infrastructure, pushing borrowing costs higher across the market. In a report published last Wednesday, Moody’s Ratings said capital spending by these hyperscale cloud companies could approach $1 trillion in 2027, up from nearly $800 billion this year, and warned that “surging capital expenditures, rising leverage and off-balance-sheet commitments” could threaten their credit quality.
Stocks fall again as tech shares lead declines
Expectations for higher rates have also weighed on equities. Semiconductor stocks were among the weakest performers last week, with the Philadelphia Semiconductor Index down more than 4% for the week. The Dow Jones Industrial Average fell 0.4%, the S&P 500 dropped 0.6%, and the Nasdaq Composite lost 2.1%. On a closing basis, the Nasdaq has now retreated 7.8% from the record high it reached in early June.
Higher interest rates tend to curb corporate and consumer spending, which can slow economic growth and pressure earnings expectations. Christopher said investors may want to wait until the current rotation in technology shares runs its course, when “there could be a better entry point,” adding that “holding some cash may not be a bad idea.”