By Joy Wiltermuth
Tough talk from the Federal Reserve about rate hikes may be needed to ease the Treasury market's rout
Fed officials have a limited window to talk tough on inflation and the potential for rate hikes before the central bank's June meeting.
The bond market has a warning for the Federal Reserve about the risk of inflation from the Iran conflict: It's time to get serious.
Yields across the roughly $30 trillion Treasury yield curve have been moving sharply higher as investors around the globe sell bonds issued by many of the world's largest economies.
In the U.S., that has pushed the policy-sensitive 2-year Treasury yield BX:TMUBMUSD02Y above 4% - or above the upper band of the Fed's own target range, as the below chart shows. Yields on bonds increase as prices fall and traders start demanding more compensation.
Bond yields are topping the Federal Reserve's short-term policy range.
The spike in yields signals concern about the Federal Reserve's readiness to react to inflation that's near 4%, as well as the ongoing U.S.-Iran standoff, which has choked off oil transport through the Strait of Hormuz.
Read: The bond market is already hiking rates as Kevin Warsh takes over as Fed's new chair
The 2-year yield was steady Monday at about 4.07% and the 10-year Treasury yield BX:TMUBMUSD10Y was near 4.6%, the highest level for both since February 2025, according to Dow Jones Market Data. The 30-year yield BX:TMUBMUSD30Y was at 5.13%, the highest since 2007.
The bond tumult comes as Wall Street grows more wary about a potentially worsening oil shock, with more Treasury auctions on deck and no end in sight to the Iran conflict.
Treasury auctions last week underwhelmed, said Tom di Galoma, a managing director at Mischler Financial Group, who pointed to yields that came in higher than expected. &#34;That rarely happens, but it's been happening more recently,&#34; he said.
While several global central banks already signaled rate hikes could be coming soon, that hasn't been the message from the Fed. &#34;I think we are in for a bit of a rocky road,&#34; di Galoma said. He also sees a pathway for the 10-year Treasury yield to hit 5%, given concerns around the Iran conflict and oil prices.
That would mean higher 30-year fixed mortgage rates and rising borrowing costs for the economy and the U.S. government. This week is set to see a $16 billion 20-year auction on Wednesday and a $19 billion auction of Treasury inflation-protected securities, or TIPS, on Thursday.
Read: Here's where Treasury yields will peak and open up a rare opportunity to buy stocks and bonds, says Wall Street veteran
The unease might also mean Fed speakers need to change their tone ahead of the June 16-17 Federal Open Market Committee meeting, the first with newly installed Fed Chair Kevin Warsh at the helm, Thierry Wizman and Gareth Berry, rates strategists at Macquarie, said in a Monday client note.
&#34;If that doesn't happen, traders will conclude the Fed is falling behind, and a further rise in U.S. inflation risk premiums and a new steepening of the yield curve may ensue,&#34; they wrote. The Fed left rates unchanged in April, but a number of top central bankers did not support language around an easing bias.
High levels of public debt also have been part of the problem, including in the U.S., where the federal debt is back above 100% of gross domestic product, or larger than the economy. Yet the more pressing concern has been last week's hot inflation readings due to the surge in oil prices (CL00) (BRN00) above $100 a barrel.
&#34;Thus, if Fed officials do the 'right thing,' the speeches and comments that emit over the next three weeks until the communications blackout period begins (on June 6) should be hawkish,&#34; Wizman and Berry wrote.
Wall Street will hear from several Fed speakers this week and next, while minutes of the Fed's April meeting are due on Wednesday.
Stocks were mostly down on Monday, with the Dow Jones Industrial Average DJIA flat and the S&amp;P 500 SPX and Nasdaq Composite Index COMP both lower.
-Joy Wiltermuth
This content was created by MarketWatch, which is operated by Dow Jones &amp; Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
05-18-26 1446ET

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The bond market is signaling the Federal Reserve to take inflation seriously and consider rate hikes before the June meeting. Treasury yields have surged, with the 2-year yield exceeding 4%, indicating concerns over inflation and geopolitical tensions. Analysts suggest that if the Fed does not adopt a hawkish tone soon, it may lead to increased inflation risk premiums and a steeper yield curve. Upcoming Treasury auctions and inflation readings are critical as Wall Street anticipates Fed communications in the lead-up to the meeting.

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The bond market has a warning for the Fed: Get serious about inflation and potential rate hikes ASAP