The Fed needs to act now to calm markets as bond yields hit highest level since 2007, a top bank says
Fed Has to Act Now to Calm Markets As Bond Yields Surge, Strategists Say - Business Insider
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Markets
A top bank says the Fed must act now to address the highest bond yields since 2007
ByNaomi Buchanan
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Incoming Federal Reserve Chair Kevin Warsh.FOMC; Bloomberg/Getty Images
2026-05-20T15:47:11.787Z
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Inflation fears driven by the ongoing Iran war and high oil prices are taking over Wall Street sending US Treasury bond yields to the highest level seen in 19 years, just before the Great Financial Crisis.
The Federal Reserve needs to strike a hawkish tone before the June 16-17 policy meeting to calm surging bond yields, Macquaire strategists said as yields near historic highs.
"Even if the Fed moves to signal that it will adopt a neutral bias in June, it may not be enough to stabilize inflation expectations and long-term UST yields," the strategists said.
The 10-year US Treasury hit 4.65%, the highest level in a more than a year and above the closely watched threshold of 4.5%flagged by Morgan Stanley CIO Michael Wilson as an indicator for a downturn in equities.
The 30-year bond yield hit its highest point since 2007. And it's not just Treasurys. In international markets, Japan's 30-year bond has risen to its highest level ever recorded.
"For the Fed to quell inflation concerns, its rhetoric must become more hawkish than what's already reflected in the (slightly) upward sloping USD OIS forward curve, which is now barely projecting one rate hike in 2026," Macquaire said.
The 2-year Treasury bond yield, which is sensitive to Fed policy, has been trading above the effective federal fund rate since March 10.
Less than a month out from the Fed's June meeting, the market sees the most likely outcome is that the Fed raises rates before year-end, according to the CME FedWatch tool.
The second most probable outcome is that the Fed rate ends 2026 where it started with no moves in either direction.
The odds of a rate cut by the end of they year sat just above 1%, marking a stark shift from the start of 2026 when investors expected two to three rate cuts this year.
The Fed will announce its next interest rate decision on June 17 with the new Fed Chair Kevin Warsh at the helm. Macquaire says the central bank can't afford to wait until then for its hawkish shift.
"An opportunity to change the Fed's rhetoric decidedly toward 'hawkish' will come with the Fed speeches today and through June 6," the strategists wrote.
"To convince bond traders that the Fed is 'serious', the 'hawkish' lead may have to come from the voting 'doves' - e.g., Chris Waller and Anna Paulson," they added.
Paulson, who is the president of the Federal Reserve Bank of Philadelphia, said it's "healthy" that investors are considering rates holding steady or even rising.
Macquaire said that if hawkishness is not sufficiently conveyed by central bankers, "traders may conclude that the Fed is falling behind further, and a new jump in US inflation risk premiums - and a new steepening of the yield curve - may ensue."
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[](https://www.businessinsider.com/author/naomi-buchanan)Naomi Buchanan
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