Bond Market Demands Rate Hikes as Inflation Surges

The Treasury market is signaling multiple rate hikes starting late this year, with the 2-year yield jumping 79 basis points since end of February to 4.17%, the highest since February 2025. The trigger was a strong jobs report showing three consecutive months of substantial job growth, with the three-month average at its highest since March 2024. Both CPI and PCE inflation measures are expected to exceed 4% in May, double the Fed's target, and have been above target for over five years. Inflation has been rising for months before the March energy shock and has spread beyond energy. Newly minted Fed chair Warsh faces difficulty persuading FOMC members to cut rates, and later to avoid hikes. The 3-year yield rose 81 basis points to 4.22%, 59 basis points above the effective federal funds rate. The 6-month yield at 3.80% indicates the first hike is expected within 3-5 months. The 30-year yield rose above 5% again, reaching 5.19% on May 19. The 10-year yield jumped 8 basis points to 4.55%. The bond market is pressuring the Fed to act on inflation, while the government appears willing to let the economy run hot to manage national debt.