The bond market is sending a new warning to investors: don’t expect any rate cuts soon.
That was evident in the move in Treasury yields this week, which crept higher as markets weighed upside risks to inflation from the Iran war and raised their expectations that the Federal Reserve will keep interest rates higher for longer.
The 30-year US Treasury yield, a measure of long-term rate expectations, was hovering just above 5% on Tuesday. It marked the first time the 30-year yield had surpassed they key psychological threshold since the summer of last year.
Inflation has been the primary driver of the move. The fear hanging over markets is that higher oil prices will stoke inflation in other parts of the economy, leading the Fed to pause its rate-cutting cycle or even hike rates to get runaway price growth under control.
Higher rates risk spoiling the outlook for stocks. Investors have been betting on rate cuts in 2026 for most of the past year, a major bullish catalyst for risk assets. As yields edge up, investors are more likely to gravitate toward bonds over stocks as they can get a comparable return with much lower risk.
The odds that the Fed could hike rates at least 25 basis points spiked past 35% on Monday before paring back to a 29% probability on Tuesday.
The odds that the Fed will lower rates at all in 2026 hovered around 8%, down from 20% a month ago.
Global strategists at JPMorgan said they saw a risk that yields could rise after the latest Fed meeting, in which central bank chief Jerome Powell spoke of the possibility of hotter inflation.
Previously, investors believed the downside risk to the job market would “outweigh inflationary concerns for much of 2026,” which would give the Fed more room to cut rates, they added.
All eyes are on jobs data this week, which is expected to give markets more direction on the rate outlook. If the unemployment rate remains low, that suggests the Fed will likely opt to keep monetary policy restrictive as they focus in on inflation, analysts at Bank of America wrote.
“By contrast, an increase in the u-rate to 4.4% or higher would renew Fed concerns about labor market weakness. But markets might not be ready to price in cuts until there is greater clarity on the trajectory of the Iran war,” analysts wrote, pointing to the April jobs report coming on Friday.
Ed Yardeni, a top economist and the President of Yardeni Research, pointed to the spread between the 10-year and 2-year Treasury yields in recent weeks, which has started to flatten as expectations of short-term rates have climbed.
“The bond market is discounting higher inflation and a Fed that stays on hold or may even have to tighten,” he wrote in a client note.
The Federal Reserve looks “completely paralyzed” in its monetary policy outlook, Mark Malek, the CIO of Siebert Financial, wrote in a note on Tuesday
“The Fed cannot cut rates while energy prices are pouring gasoline on an inflation fire. Which means no relief from the mortgage market, no relief from credit card rates, no relief anywhere that requires the cost of money to come down,” he added of rate expectations.
