Fed Rate Hike Odds Soar as Bond Market Reacts to Warsh's Speech

The US bond market is preparing for a potential hike in interest rates as investors bet on the Federal Reserve taking action to curb high inflation. According to data from CME Group, there's now a nearly 58% probability of a rate hike next month, up from 35% just a day earlier.

Chairman Kevin Warsh emphasized in his speech at an annual economic symposium that short-term interest rates are the primary tool for the Fed to control inflation. He also stated that broad financial conditions are not restrictive, implying that short-term interest rates may not be high enough to tame the economy and inflation.

The two-year Treasury yield jumped to 4.35% from 4.22% before Warsh's speech, a significant move indicating traders' growing expectations for a rate hike. The 10-year Treasury yield rose to 4.72%, while the 30-year Treasury yield reached 5.21%. These increases suggest investors are pricing in a more credible Fed.