US Fed rate-hike bets mount before US inflation data and Fed chair testimony
Bond traders are increasingly anxious it will take higher interest rates to bring inflation back toward the US Fed’s 2% target
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BOND traders ramped up bets for a July interest-rate hike ahead of US inflation data and an appearance by the head of the US Federal Reserve that stand to reinforce the need for action.
Rising US rate expectations are evident both in interest-rate options, where the market-implied chance of a quarter-point hike later in July has climbed to about 50 per cent from less than 10 per cent, and in US government bonds.
The two-year Treasury note’s yield, more sensitive than longer-maturity debt to changes in the US Fed’s rate, stayed above 4.25 per cent on Tuesday (Jul 14), exceeding the policy rate by a widening margin.
“July is live for a hike,” said Ed Al-Hussainy, portfolio manager at Columbia Threadneedle, who sees an increase as likelier than not. Although the inflation rate targeted by the US Fed was somewhat lower than the consumer price index in May, at 4.1 per cent, “we are going to need some luck to get the numbers drifting back to 2 per cent.”
The moves accelerated after US Fed Governor Christopher Waller – until recently one of the central bank’s most dovish officials – said a rate increase “in the near term” should be considered if the inflation data show “another hot reading” on US core prices, which exclude food and energy.
June US consumer price index data to be released Tuesday at 8.30 am in Washington (8:30 pm on Tuesday in Singapore) are anticipated to show the first declines in the overall and core inflation rates since January, according to the median forecasts in a Bloomberg survey. Those rates were 4.2 per cent and 2.9 per cent in May.
Still, bond traders are increasingly anxious it will take higher interest rates to bring inflation back toward the US Fed’s 2 per cent target.
Oil prices extended gains on Tuesday, with US military forces set to resume blockading traffic to and from Iranian ports and coastal areas. Trump also said the US would keep up attacks on Iran.
Their stress is compounded by US Fed Chairman Kevin Warsh’s aversion to making predictions about its course. Warsh, who took office in May, is slated to testify before Congress on Tuesday and Wednesday on the central bank’s semi-annual report on monetary policy.
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Short-term interest-rate markets fully price in a US Fed rate increase by the end of 2026 and a second one by mid-2027 – probably not enough, Al-Hussainy said. He thinks the US central bank is likely to unwind all three of the quarter-point cuts it made over the final four months of 2025 in response to weakening labour-market conditions.
Those probabilities have increased since Warsh, speaking at the European Central Bank’s symposium in Sintra, Portugal on Jul 1, highlighted recent declines in inflation risks.
Wagers on near-term US Fed rate hikes have flooded into the interest-rate futures market, helping drive up open interest in August federal funds futures. The number of contracts in which traders hold positions has increased about 23 per cent in July. Open interest data are reported after the close, and stand to increase further based on Monday’s trading activity.
The US CPI report is expected to show a 0.1 per cent drop in overall prices from May, bringing the year-on-year rate down to 3.8 per cent from 4.2 per cent. Core prices are seen rising 0.2 per cent from May and 2.8 per cent from June 2025.
Even softer-than-expected CPI readings may provide limited relief in the bond market, however, where two-year Treasury yields have risen about 10 basis points in July, 10-year yields 15 basis points, wiping out the market’s gains for 2026 as measured by the Bloomberg Treasury index.
“Investors remain focused on the Jul 29 FOMC meeting as potentially the timing for Warsh’s first rate hike,” Ian Lyngen, head of US rates strategy at BMO Capital Markets, wrote in a note.
While he expects the market’s conviction in a July rate hike to decrease based on June US CPI data and Warsh’s Jul 14-15 testimony, Warsh’s disdain for forward guidance should limit how much.
The market may continue to price in at least some chance of a July rate hike even if the CPI data are soft, and the Fed could surprise investors by raising rates even if that outcome isn’t close to fully priced in, Lyngen said. BLOOMBERG
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