US Treasuries "Corner" Warsh: Hawkish Talk Alone Isn't Enough, Market Wants Rate Hikes

By: Zhang Yaqi, Wallstreetcn

The US Treasury market is sending a clear signal to Fed Chair Walsh: tough rhetoric on fighting inflation is far from enough to soothe investors.

The new round of US-Iran military conflict that erupted in July caught Wall Street off guard. International oil prices briefly broke through $100 per barrel, triggering another large-scale sell-off in the US Treasury market, which is sized at up to $30 trillion. The benchmark 10-year US Treasury yield has cumulatively risen by more than 30 basis points since the end of June, to around 4.678%, approaching a nearly ten-year high. At the same time, the 2-year US Treasury yield, which is most sensitive to monetary policy, also climbed to about 4.328%, breaking through the Fed's current interest rate ceiling of 3.75%, reflecting strong market expectations for rate hikes.

On Wednesday, the Federal Reserve will announce its policy decision. According to the CME FedWatch Tool, as of last Friday, the market estimated a 62% probability that the meeting would keep interest rates unchanged, but the probability of a rate hike has surged from about 13% a week ago to about 38%.

"This shows how worried the market is about inflation, and also how worried the market is about whether the Fed can walk the talk," said Gennadiy Goldberg, Head of US Rates Strategy at TD Securities, referring precisely to Walsh's series of public statements on pushing inflation back to the 2% target.

Oil Price Shock Combined with Bond Market Pressure, US Treasury Yields Approach Ten-Year High

The US-Iran conflict is the direct trigger for this round of rising US Treasury yields. Soaring oil prices have exacerbated market concerns about inflation returning, prompting traders to sell off US Treasuries heavily. According to GasBuddy data, US retail prices for regular gasoline and diesel have recently returned to above $4 and $5.20 per gallon, respectively.

After Walsh held his first press conference as Fed Chair in June, the US Treasury market briefly rebounded, but this gain quickly vanished. The 30-year US Treasury yield stubbornly remained above 5%, causing heavy losses for investors who had previously bet on long-term bonds.

David Rosenberg, Founder and President of Rosenberg Research & Associates, wrote in a report last Friday: "We did not anticipate this latest chapter of the US-Iran war, which is a complicating factor for any duration assets at present." He also pointed out that the continued expansion of technology-related corporate bond issuance is also putting pressure on the US Treasury market. Rosenberg stated that he has adjusted his portfolio, shifting his long position in 30-year US Treasuries, which previously underperformed expectations, to short-duration US Treasuries.

Paul Christopher, Head of Global Investment Strategy at Wells Fargo Investment Institute, said: "The Fed needs to hear this signal clearly. Uncertainty is compounding," and bond market investors are demanding corresponding compensation.

Controversy Over Rate Hike Window: The Cost of Policy Action and the Dilemma of Timing

The Fed is not a monolith. It is reported that some members of the rate-setting committee are inclined to curb inflation through rate hikes. However, the problem lies in the fact that the timing of any rate hike action is extremely sensitive.

Inflation itself erodes the real value of fixed-income assets, while rate hikes will further depress bond prices and drag on other financial assets such as stocks. At the same time, Barclays analysts expect the US fiscal deficit scale in 2026 to be about $2 trillion, and the continued large-scale issuance of US Treasuries will be an important way to fill the gap, which also means that bond market supply pressure will be difficult to alleviate in the short term.

In addition, large-scale borrowing by the technology industry is also amplifying bond market pressure. Large technology companies represented by "hyperscale cloud computing providers" are competing to issue corporate bonds to support artificial intelligence infrastructure construction, pushing up overall market borrowing costs. Moody's Ratings expected in a report last Wednesday that the capital expenditure of these hyperscale cloud computing providers will approach $1 trillion in 2027, surging further after nearly $800 billion this year, and warned that "surging capital expenditures, rising leverage ratios, and off-balance-sheet commitments" will pose a threat to the credit quality of this group.

Stock Market Suffers Another Heavy Blow, Tech Stocks Lead Decline

The cloud of high interest rate expectations also looms over the stock market. Last week, semiconductor stocks led the decline, with the Philadelphia Semiconductor Index falling more than 4% in a single week. The Dow Jones Industrial Average fell 0.4% for the week, the S&P 500 Index fell 0.6%, and the Nasdaq Composite Index fell as much as 2.1%. The closing price of the Nasdaq Index has cumulatively fallen back 7.8% from the historical high set in early June.

Higher interest rate levels tend to suppress corporate and consumer spending, thereby dragging on economic growth and eroding corporate earnings expectations. Wells Fargo's Christopher suggested that investors might as well wait for this round of tech stock rotation to come to an end, when "there may be a better entry opportunity," and hinted that "holding a certain cash reserve may not be a bad thing."