Treasury Traders Price In Fed Rate Hikes by 2027 as Inflation Fears Resurface

U.S. Treasury traders are betting the Federal Reserve could raise interest rates by 2027, abandoning earlier expectations for cuts, as the Iran conflict drives energy prices higher and reignites inflation risks ahead of the May nonfarm payrolls report due this week. Options positioning now reflects a path toward tightening, with some wagers targeting a 10-year Treasury yield above 5% in the coming months, a level not seen since 2023. The 10-year yield stood at 4.47% on Monday, up roughly 50 basis points since late February, while the 2-year yield climbed to about 4%, well above the Fed's current 3.5%-3.75% policy rate. The shift marks a stark reversal from earlier dovish bets tied to new Fed Chair Kevin Warsh, whose first rate-setting meeting convenes in June. Bloomberg Economics estimates the rise in yields has already tightened financial conditions by an amount equivalent to 75 basis points of additional rate hikes. The April PCE inflation gauge rose 3.8% year-over-year, far exceeding the central bank's 2% target. Economists expect May payrolls to show 90,000 new jobs with unemployment at 4.3%.