US 10-Year Treasury Yield Hits 19-Month High as Fed Rate Hike Bets Rise

Oil prices gained more than 2% after hitting session highs during US trading hours, following President Donald Trump's threat of additional attacks on Iran. According to The Economic Times, this oil price surge has fueled expectations that the Federal Reserve may raise interest rates to contain persistent inflation. U.S. crude rose 3.38% to $86.24 a barrel and Brent climbed to $91.20 per barrel, up 3.52% on Monday as hostilities between the U.S. and Iran flared after military attacks resumed. Iran responded by attacking U.S. forces stationed in Jordan, according to a Fox News reporter on Sunday, citing a U.S. source. However, Iran is still seeking a negotiated solution to its conflict with the U.S., President Masoud Pezeshkian said on Monday. JoAnne Bianco, partner and senior investment strategist at BondBloxx Investment Management, noted that "crude being back up complicates the inflation picture, especially if that's sustained."

US Treasury yields experienced a sharp rise following Fed Chairman Kevin Warsh's Jackson Hole speech, with the 2-year Treasury yield rising 6.6 basis points to 4.29%, its highest in a month. According to reports from Live Mint, this marked the third consecutive occasion where Warsh's post-policy meeting press conferences have triggered sharp rises in US Treasury bonds. The market reaction reflects investor uncertainty about the Fed's new communications approach, with Warsh emphasizing his commitment to provide less communication to markets. Following the speech, 59.5% of bond traders now expect the Fed to raise rates at its September meeting, a significant jump from approximately 35.5% the previous day, as reported by Investing.com India. The rates market was showing an even chance of a rate increase next month, up from 35% before the speech, as reported by Bloomberg. U.S. stocks were higher late in the morning on Friday, with the Nasdaq up 0.6% and the S&P 500 up 0.5%, while the U.S. dollar index rose 0.4% to 99.55, again reflecting expectations that rates will rise. However, longer-term yields on 10-year and 30-year Treasuries were mostly flat, suggesting investors aren't worried that higher rates will be needed for a long stretch of time to fight inflation.

BMO estimates that after-tax corporate profits are approaching $4 trillion annualized, rising 20% from a year ago and reaching a record 12.1% of GDP. According to Investing.com India, this represents the centre of gravity in the current economic cycle, with profits taking on an almost exponential shape since the pandemic. The second estimate of second-quarter GDP included the first look at corporate profits, which arrived with the door off its hinges. Tariff uncertainty has faded for many businesses, while tariff refunds are beginning to land directly on corporate bottom lines, with Treasury data showing tariff revenue turned negative by $25.6 billion in June as refunds started flowing. The labour market has moved closer to balance, productivity has strengthened, and supply chain pressures have eased since the opening phase of the Middle East conflict. Additionally, the OBBBA tax code allows businesses to deduct the full cost of qualifying equipment in the year it enters service, providing an engraved invitation for companies preparing to spend heavily on data centres, chips, networking equipment and power infrastructure.

AI investment is becoming a direct growth engine, with capital goods imports excluding autos surging 47% from a year earlier through July. According to Investing.com India, this acceleration is driving the AI capital spending cycle that appears to be gathering speed rather than approaching exhaustion. BMO expects real business equipment spending to grow 11% in 2026 and another 7.5% in 2027, helping lift its 2027 GDP forecast to 2.2%, slightly above its estimate of the economy's long-term potential. BMO raised its forecast for third-quarter business equipment spending to a 17% annualized pace, enough to offset much of the drag from rising imports. Warsh offered a bullish assessment of AI's potential impact, stating that "the potential for substantially higher growth is on the rise" as ever-expanding pools of capital pour into AI-related infrastructure. The central bank is watching the development of large language models and tokens used to access these models attentively, while posing key questions about whether AI applications will spur significant, sustained productivity rises across the economy.

Warsh acknowledged that inflation remains stubbornly above the Fed's 2% target, with the most recent PCE inflation reading showing 3.7% annual change and core measures at 3.3%. As reported by AP, Warsh stated that "inflation is still too high" and suggested the central bank may have to raise interest rates in the coming months to bring it down. He pointed to data showing that more than half of goods and services tracked by the government have seen price increases of 3% or higher in the past year, which is "well above" the roughly one-third that saw such increases in the two decades before the pandemic. Warsh noted that "inflation data are more concerning than trends in the job market, where the unemployment rate is low," and argued that inflation is unlikely to move back to the target on its own. According to the Fed's preferred measure, inflation was 3.7% in the most recent reading. The Federal Reserve will "have work to do" if policymakers are not confident that underlying inflation is returning to its 2% target, marking the closest Warsh has come to acknowledging interest rate hikes may be needed to ease price pressures. In his Jackson Hole speech, Warsh emphasized that "price stability is not self-executing, nor is inflation necessarily mean-reverting. It is the Fed's job to deliver stable prices," while noting that "this summer's PCE and CPI readings were better than expected, but they do not tell me that underlying trends have meaningfully improved."

Market observers noted that "Warsh is giving the market what it wants" to a certain extent, as he acknowledged inflation as an ongoing issue while sticking to his guns of not being overly forward about predicting future Fed actions. As reported by multiple market sources, analysts found his communication to be very clear in what the Fed would and would not do, with one observer noting that "he clearly is sticking to his guns with respect to forward guidance and the risks that presents to markets." The one hawkish thing to note is that he did mention that the labor market is stable and output is strong, which led markets to view the speech as somewhat hawkish. One analyst noted that "the one thing lacking from this speech was a credible plan to actually fight inflation," with questions about whether the Fed will push harder on running down the Fed's balance sheet. According to Bloomberg, economists say the speech was "less about signaling September and more about restoring clarity and credibility." Sean Simko, head of fixed-investment management at SEI Investments Corp, noted that "the Fed is ready to act when needed," adding that the August employment report due Friday and consumer-price data scheduled for Sept. 11 will be key ahead of the Fed's Sept. 16 policy decision. Daniel Siluk from Janus Henderson Investors noted that "markets appear to have taken comfort from that clarity, with higher front-end yields accompanied by a stable long end, suggesting greater confidence in the Fed's inflation-fighting framework."