Expectations for a Fed rate hike rise, causing short-term U.S. Treasury yields to surge.

Huoxing Finance reports that on September 28, Bloomberg Opinion columnist Jonathan Levin wrote that, as the Federal Reserve resumes rate hikes, the U.S. Treasury market has shifted focus from prior concerns about fiscal deficits and long-term debt supply to pricing in expectations of higher interest rates persisting for an extended period. Since Fed Chair Powell delivered a hawkish speech at Jackson Hole at the end of August, the real yields on U.S. 2-year and 5-year TIPS have risen by approximately 57 and 64 basis points, respectively, indicating that recent increases in Treasury yields primarily reflect rising real rate expectations rather than a significant deterioration in inflation expectations. Since September, the yield on the 2-year U.S. Treasury has risen by about 55 basis points cumulatively, and the spread between the 10-year and 2-year Treasury yields narrowed to around 17 basis points—the lowest level since early 2025. Markets currently price in a roughly two-thirds probability of another Fed rate hike in October and have already priced in at least three 25-basis-point hikes over the next year. Meanwhile, the Fed’s continued rate hikes have added new pressure on Treasury Secretary Bessent’s debt management strategy. The U.S. Treasury has previously relied heavily on short-term T-bills for financing and expanded its long-term Treasury buyback program to improve liquidity in the long-term bond market. Levin argues that this approach helps defer locking in higher long-term financing costs, but persistent Fed rate hikes will increase government interest expenses as short-term debt is frequently rolled over. The Treasury now faces a trade-off between extending debt maturities in a high-rate environment and continuing to rely on short-term funding; the next quarterly refinancing announcement is scheduled for November 4.