Is the drop in US Treasury yields a "false break" or a "real fall"? Geopolitical easing vs. structural pressures.
2026-05-26 10:29:26
On Tuesday (May 26), U.S. Treasury yields fell across the board as risk appetite was boosted by progress in U.S.-Iran negotiations. The 10-year Treasury yield fell nearly 5 basis points to 4.507%, and the 30-year Treasury yield fell about 3 basis points to 5.033%.
However, the market just experienced an extreme repricing of interest rate hikes last week—the 30-year Treasury yield once touched 5.2%, the highest since 2007; the 10-year yield once approached 4.7%. The 2-year Treasury yield remained stable above 4.1%, well above the upper limit of the Fed's target range of 3.50%-3.75%, indicating that the market is still pricing in interest rate hikes.
Ed Yardeni of Yardeni Research warned that "bond vigilantes" are gathering: if the Federal Reserve does not actively tighten credit conditions, they will "maintain economic order" by selling bonds to push up yields.
Yardeni predicts that new Chairman Warsh may be forced to raise interest rates in July to build market credibility, and a slow response to inflation signals could trigger greater market turmoil. However, he also raises the "Warsh Paradox"—Warsh's hawkish stance in the early stages of his term might unexpectedly lower mortgage rates and ease corporate financing pressures by suppressing long-term yields, thus achieving the White House's economic goals.
JPMorgan Chase CEO Jamie Dimon's warning was more direct. He pointed out that interest rates "could easily continue to rise," and the US faces the refinancing pressure of $30 trillion in debt (with about $2 trillion to be dealt with this year). The market may be underestimating the structural impact of the shift from "excess savings" to "insufficient savings." Dimon criticized the market for being overly optimistic—assuming the Middle East situation can be resolved smoothly, but geopolitical risks have not truly dissipated, and upward pressure on interest rates will persist.
As US Treasury yields rise, the latest data shows inflation is picking up during the US-Iran conflict, while other economic data suggests the economy remains resilient in the face of rising oil prices.
In terms of prices, wholesale prices surged 6% in April, mainly driven by rising energy prices. The latest consumer price report previously indicated that inflation is widening as rising oil input costs are passed on to consumers.
In terms of employment, 115,000 new jobs were created in April, and the employment growth in March was revised upward by 7,000 to 185,000, reversing the weak trend (employment decline) at the beginning of the year.
Other indicators show that consumers are still spending. In the week ending May 16, Redbook's same-store retail sales index jumped 8.9%, confirming the previous week's surge of 9.6%, well above the 5.8% average for the whole of 2025.
Home Depot reported strong same-store sales and large-scale purchases, stating in its earnings call that its customers "seem to be doing quite well... the main issue is the uncertainty that's keeping them from taking on large projects." Target also showed robust consumer spending, with first-quarter results exceeding expectations.
This complex dynamic has rapidly altered market expectations for interest rates. According to the CME FedWatch tool, as of May 26, the market's expectation of at least one rate hike before December had jumped from 30% a week earlier to 57%, with the probability of an October rate hike approaching 53%. Even more remarkably, by March 2027, the market's implied probability of a rate hike had reached a staggering 96.7%, reflecting that the market is pricing in a "higher and longer" or even "continuously tightening" interest rate environment.
This reversal was swift and caught many market participants off guard—just two months ago, the market widely expected two to three rate cuts in 2026, but now those expectations have almost vanished. The market narrative has completely shifted from "when will the Fed cut rates" to "whether the Fed will raise rates again."
Philadelphia Fed President Anna Paulson, a voting member of this year's FOMC, stated publicly last week, "The way the market has reacted to economic news over the past few months has largely aligned with my thinking." She made it clear that current inflation levels "remain too high," and the Fed needs to make substantial progress in combating inflation before considering interest rate cuts.
Paulson believes that keeping interest rates stable at present provides the Federal Reserve with a valuable window of opportunity to more clearly assess the economic trend.
She further pointed out that the market has begun to consider the possibility of interest rates remaining unchanged or even being raised later, and this market trend is "benign" and "healthy." Paulson's statement clearly confirms that the Federal Reserve is shifting its mindset from "the next step is to cut interest rates" to "whether interest rates are high enough."
“Inflation is too high,” Philadelphia Federal Reserve President Anna Paulson said last week, noting that inflation was already high even before the Middle East conflict and soaring oil and gas prices.
As a voting member of the FOMC this year, she outlined a clear three-tiered policy framework: maintain interest rates unchanged (if necessary, for an extended period); tighten further if necessary; and only consider rate cuts when inflation shows a clear and sustainable decline. Paulson emphasized that the current moderately restrictive monetary policy is helping to mitigate the price increases caused by tariffs and the Middle East conflict. She believes the market has begun to consider the scenario of unchanged or even raised interest rates, and this pricing change is "benign and healthy."
Paulson's statement vividly illustrates the Fed's shift in stance from "the next step is to cut rates" to "whether rates are high enough." This shift was also confirmed by former Chairman Powell, who stated at his last press conference at the end of April that the committee's focus had shifted from a bias towards rate cuts to a "more neutral position."
In conclusion, the bond market is sending a clear signal to the Federal Reserve through soaring yields: current interest rates are insufficient to curb inflation. Economic data shows that inflation is rising while consumption remains resilient, and market expectations have shifted from rate cuts to holding rates steady or even tightening slightly. The remarks of Philadelphia Fed President Paulson confirm the ongoing shift in thinking within the central bank—from "when to cut rates" to "whether interest rates are high enough." Under the dual pressure of the bond market's "threat" and economic data, the Fed may have to maintain a "higher and longer" interest rate stance in the Warsh era.
However, the market just experienced an extreme repricing of interest rate hikes last week—the 30-year Treasury yield once touched 5.2%, the highest since 2007; the 10-year yield once approached 4.7%. The 2-year Treasury yield remained stable above 4.1%, well above the upper limit of the Fed's target range of 3.50%-3.75%, indicating that the market is still pricing in interest rate hikes.
Bond vigilantes "threaten": If the Federal Reserve doesn't tighten, they will do it for us.
Ed Yardeni of Yardeni Research warned that "bond vigilantes" are gathering: if the Federal Reserve does not actively tighten credit conditions, they will "maintain economic order" by selling bonds to push up yields.
Yardeni predicts that new Chairman Warsh may be forced to raise interest rates in July to build market credibility, and a slow response to inflation signals could trigger greater market turmoil. However, he also raises the "Warsh Paradox"—Warsh's hawkish stance in the early stages of his term might unexpectedly lower mortgage rates and ease corporate financing pressures by suppressing long-term yields, thus achieving the White House's economic goals.
JPMorgan Chase CEO Jamie Dimon's warning was more direct. He pointed out that interest rates "could easily continue to rise," and the US faces the refinancing pressure of $30 trillion in debt (with about $2 trillion to be dealt with this year). The market may be underestimating the structural impact of the shift from "excess savings" to "insufficient savings." Dimon criticized the market for being overly optimistic—assuming the Middle East situation can be resolved smoothly, but geopolitical risks have not truly dissipated, and upward pressure on interest rates will persist.
Economic data: Inflation rises while consumption remains resilient.
As US Treasury yields rise, the latest data shows inflation is picking up during the US-Iran conflict, while other economic data suggests the economy remains resilient in the face of rising oil prices.
In terms of prices, wholesale prices surged 6% in April, mainly driven by rising energy prices. The latest consumer price report previously indicated that inflation is widening as rising oil input costs are passed on to consumers.
In terms of employment, 115,000 new jobs were created in April, and the employment growth in March was revised upward by 7,000 to 185,000, reversing the weak trend (employment decline) at the beginning of the year.
Other indicators show that consumers are still spending. In the week ending May 16, Redbook's same-store retail sales index jumped 8.9%, confirming the previous week's surge of 9.6%, well above the 5.8% average for the whole of 2025.
Home Depot reported strong same-store sales and large-scale purchases, stating in its earnings call that its customers "seem to be doing quite well... the main issue is the uncertainty that's keeping them from taking on large projects." Target also showed robust consumer spending, with first-quarter results exceeding expectations.
Shift in market expectations: from interest rate cuts to holding rates steady or even tightening slightly.
This complex dynamic has rapidly altered market expectations for interest rates. According to the CME FedWatch tool, as of May 26, the market's expectation of at least one rate hike before December had jumped from 30% a week earlier to 57%, with the probability of an October rate hike approaching 53%. Even more remarkably, by March 2027, the market's implied probability of a rate hike had reached a staggering 96.7%, reflecting that the market is pricing in a "higher and longer" or even "continuously tightening" interest rate environment.
This reversal was swift and caught many market participants off guard—just two months ago, the market widely expected two to three rate cuts in 2026, but now those expectations have almost vanished. The market narrative has completely shifted from "when will the Fed cut rates" to "whether the Fed will raise rates again."
Philadelphia Fed President Anna Paulson, a voting member of this year's FOMC, stated publicly last week, "The way the market has reacted to economic news over the past few months has largely aligned with my thinking." She made it clear that current inflation levels "remain too high," and the Fed needs to make substantial progress in combating inflation before considering interest rate cuts.
Paulson believes that keeping interest rates stable at present provides the Federal Reserve with a valuable window of opportunity to more clearly assess the economic trend.
She further pointed out that the market has begun to consider the possibility of interest rates remaining unchanged or even being raised later, and this market trend is "benign" and "healthy." Paulson's statement clearly confirms that the Federal Reserve is shifting its mindset from "the next step is to cut interest rates" to "whether interest rates are high enough."
Federal Reserve officials have stated that they have shifted from a bias towards interest rate cuts to a neutral stance.
“Inflation is too high,” Philadelphia Federal Reserve President Anna Paulson said last week, noting that inflation was already high even before the Middle East conflict and soaring oil and gas prices.
As a voting member of the FOMC this year, she outlined a clear three-tiered policy framework: maintain interest rates unchanged (if necessary, for an extended period); tighten further if necessary; and only consider rate cuts when inflation shows a clear and sustainable decline. Paulson emphasized that the current moderately restrictive monetary policy is helping to mitigate the price increases caused by tariffs and the Middle East conflict. She believes the market has begun to consider the scenario of unchanged or even raised interest rates, and this pricing change is "benign and healthy."
Paulson's statement vividly illustrates the Fed's shift in stance from "the next step is to cut rates" to "whether rates are high enough." This shift was also confirmed by former Chairman Powell, who stated at his last press conference at the end of April that the committee's focus had shifted from a bias towards rate cuts to a "more neutral position."
The bond market is forcing the Federal Reserve to adopt a new consensus on "higher and longer" interest rates.
In conclusion, the bond market is sending a clear signal to the Federal Reserve through soaring yields: current interest rates are insufficient to curb inflation. Economic data shows that inflation is rising while consumption remains resilient, and market expectations have shifted from rate cuts to holding rates steady or even tightening slightly. The remarks of Philadelphia Fed President Paulson confirm the ongoing shift in thinking within the central bank—from "when to cut rates" to "whether interest rates are high enough." Under the dual pressure of the bond market's "threat" and economic data, the Fed may have to maintain a "higher and longer" interest rate stance in the Warsh era.
- Risk Warning and Disclaimer
- The market involves risk, and trading may not be suitable for all investors. This article is for reference only and does not constitute personal investment advice, nor does it take into account certain users’ specific investment objectives, financial situation, or other needs. Any investment decisions made based on this information are at your own risk.
