U.S. bond turmoil shatters interest rate cut dreams! Market expectations drastically reverse: probability of Fed rate hike by end of year reaches as high as 43%

The yield on US Treasury bonds continues to rise, completely changing market expectations for the timing of the next rate hike by the Federal Reserve. Data from the prediction trading platform Kalshi shows that traders believe the probability of a rate hike by the Federal Reserve before July 2027 is 63%, with a 43% probability of a rate hike this year. Traders on another prediction platform, Polymarket, believe there is a 35% probability of a rate hike in 2026. The turbulence in US bonds shatters hopes of a rate cut, and the "rate hike ghost" reappears Although US President Donald Trump originally nominated a new Chairman of the Federal Reserve with the intention of pushing for a rate cut, his nominee Kevin Warsh may trigger the first rate hike cycle by the Federal Reserve since 2023. In the past 24 hours, market expectations for a rate hike by the Federal Reserve have increased sharply due to the soaring US bond yields, escalating inflation, the ongoing stalemate in Iran, and no clear signs of a drop in oil prices. Previously, traders believed there was only a 50% chance of a rate hike in the first half of 2027. The likelihood of a rate hike by the Federal Reserve before July 2027 has significantly increased. As expectations for a rate hike rise, the new Federal Reserve Chairman Warsh will be sworn in on Friday, replacing Jerome Powell. Trump nominated Warsh to be the new Chairman of the Federal Reserve at the end of January, criticizing Powell for not cutting interest rates quickly. However, the probability of a rate cut has since been on a downward trend. With a resilient job market and rising inflation, many economists have downgraded their forecasts for a rate cut. Many members of the Federal Open Market Committee (FOMC) made it clear at the last meeting that they do not intend to signal any future rate cuts. The continuous rise in US Treasury bond yields has prompted investors to reevaluate the outlook. On Tuesday, the 30-year US Treasury bond yield rose to the highest level since 2007. Ed Yardeni, chief investment strategist at Yardeni Research and proponent of the "bond vigilantes," said on Monday that the bond market's impact on monetary policy may be greater than Warsh, the incoming Chairman. He said, "Who is really leading the way in monetary policy? The answer is undoubtedly the bond market vigilantes." However, Chris Senyek, chief investment strategist at Wolfe Research, presented a different view in a report on Tuesday, suggesting that the bond market turmoil may force a turnaround in the Middle East situation, thereby easing upward pressure on inflation. He said, "We believe the US Treasury market has been sending signals of high inflation, and this week's developments are the final straw that breaks the camel's back. Our assessment is that the bond vigilantes may push up bond yields, attempting to force the Trump administration to quickly resolve the Iran issue." Trump eases pressure for a rate cut, and it becomes a consensus for the Federal Reserve to stand by in June It is worth noting that as the new Chairman of the Federal Reserve, Warsh, is about to take office, Trump's insistence on a rate cut has softened. According to reports, Trump said in a recent interview that the escalating inflation related to the conflict with Iran has made the prospects for a rate cut in the US complicated. Only when the situation in the Middle East stabilizes can the inflation data be fully evaluated. "Before the war is over, you can't really see these data clearly," Trump said. He was referring to the impact of rising oil prices related to the conflict with Iran. Warsh's first interest rate meeting will be held in mid-June, when he will face growing hawkish forces. Goolsbee of the Chicago Fed stated this week that the US faces high inflation and that inflation must be the top consideration for Warsh as Chairman. Yardeni of Yardeni Research also believes that, given the "no longer" suitable market environment for easing policies, the Federal Reserve should cancel its accommodative stance at the June meeting. He also predicts that the Fed will keep rates unchanged at the June meeting and shift towards a tightening policy stance. Currently, the interest rate futures market believes that there is nearly zero possibility of the Federal Reserve adjusting monetary policy rates in June.