US Treasury yields jump as Fed projections lift rate hike bets for 2026

• Money markets price in rate hike as likely by September, fully by December

Short-dated US Treasury yields jumped Wednesday after the Federal Reserve’s latest projections signaled that policymakers remain split but increasingly open to an interest rate hike this year.

The yield on the policy-sensitive two-year Treasury note rose 11 basis points to 4.16% following the Fed decision, with the dollar also gaining. Money markets now indicate that a rate hike is seen as likely by September and fully priced in by December.

The Federal Reserve left its benchmark interest rate unchanged in a range between 3.5% and 3.75% at its June meeting, the first under Chair Kevin Warsh.

The central bank’s quarterly projections, known as the “dot plot,” however, showed that nine officials expect at least one quarter-point rate increase in 2026, while six project at least two hikes. Nine other officials expect no move or a rate cut.

The projections included 18 entries instead of 19, as Warsh declined to submit his forecast, consistent with his criticism of forward guidance.

The shift marks a sharp reversal from earlier this year, when Wall Street had priced in multiple rate cuts following President Donald Trump’s selection of Warsh as Fed chair.

Expectations changed after US and Israeli strikes on Iran in late February pushed energy prices higher and revived inflation concerns. Stronger-than-expected US economic data also reinforced investor expectations that borrowing costs could remain elevated.

The Treasury market has fallen around 1.5% since late February, while benchmark 10-year yields have climbed nearly half a percentage point during the same period.

Following Wednesday’s Fed projections, shorter-term yields rose sharply, narrowing the gap between two-year and 10-year Treasury yields to within 30 basis points, the smallest spread in more than a year.

The yield-curve flattening is generally seen as a sign that investors expect tighter Fed policy to weigh on future growth and inflation.