Woofun AI reports that the US Treasury market is transmitting an urgent signal to Fed Chair Powell, indicating that a mere hawkish stance is insufficient to stabilize investor sentiment as the central bank approaches its 2% inflation target.

The catalyst for this volatility emerged in July when a new round of military conflict between the US and Iran caught Wall Street off guard. International oil prices briefly surpassed $100 per barrel, triggering massive sell-offs across the $30 trillion US Treasury market. This geopolitical shock has forced a rapid reassessment of risk premiums.

Yield curve dynamics have shifted dramatically since the end of June. The 10-year Treasury note yield has risen by over 30 basis points to reach 4.678%, approaching a near-decade high.

Meanwhile, the 2-year Treasury note, which is most sensitive to monetary policy, has climbed to 4.328%, surpassing the Fed's current 3.75% upper bound and reflecting strong market expectations for imminent rate hikes.

On Wednesday, the Fed will announce its policy decision for this meeting. According to the CME FedWatch Tool, as of last Friday, the market assigned a 62% probability to the meeting maintaining interest rates.

However, the probability of a rate hike has surged from approximately 13% a week ago to around 38%, highlighting a rapid shift in market consensus.

Gennadiy Goldberg, head of US rate strategy at TD Securities, noted that this shift underscores deep market concern regarding inflation and the Fed's ability to act consistently with Powell’s public statements on returning inflation to the 2% target. The disconnect between rhetoric and action is widening.

Woofun AI data shows that the US-Iran conflict served as the direct catalyst for this round of yield increases. Surging oil prices intensified fears of an inflation resurgence, prompting traders to sell US Treasuries aggressively. Consequently, average retail prices for gasoline and diesel in the US have recently returned to over $4 per gallon and $5.20 per gallon, respectively, directly impacting consumer costs.

Following Powell's first press conference as Fed Chair in June, the US Treasury market experienced a brief rebound.

However, this upward trend quickly dissipated as the yield on the 30-year Treasury bond stubbornly remained above 5%. This persistence caused heavy losses for investors who had previously bet on long-term bonds, exposing the fragility of prior stability assumptions.

David Rosenberg, founder and president of Rosenberg Research & Associates, wrote in a report last Friday that the latest chapter of the US-Iran conflict was unanticipated and represents a complex factor for any duration asset. He highlighted that the continued expansion of tech-related corporate bond issuance is putting additional pressure on the US Treasury market, prompting him to adjust his portfolio by shifting underperforming long positions in 30-year US Treasuries to short-duration US Treasuries.

Paul Christopher, Global Investment Strategist at Wells Fargo Investment Institute, stated that the Fed needs to heed this signal as uncertainty compounds and bond market investors demand appropriate compensation. Barclays analysts project that the U.S. fiscal deficit in 2026 will be around $2 trillion, with massive Treasury issuance serving as the key method to fill the gap, indicating that near-term bond market supply pressure is unlikely to ease.

Furthermore, mega-cap cloud computing companies are issuing corporate bonds at a feverish pace to support AI infrastructure construction. Moody's Investors Service estimated in a report last Wednesday that capital expenditures for these companies in 2027 will approach $1 trillion, soaring from nearly $800 billion this year, and warned that "rising capital spending, increasing leverage, and off-balance-sheet commitments" will threaten their credit quality.

The shadow of higher rate expectations has also cast a pall over the stock market. Last week, the Philadelphia Semiconductor Index fell over 4%, while the Dow Jones Industrial Average declined 0.4%, the S&P 500 Index dropped 0.6%, and the Nasdaq Composite Index plummeted by 2.1%. The Nasdaq Index has now retraced 7.8% from its record high set in early June. As higher interest rates suppress corporate and consumer spending, Wells Fargo's Christopher suggested that investors may consider waiting for the end of the current tech stock rotation for a better entry point, noting that holding cash may be prudent. For further insights, follow BlockBeats on Telegram and Twitter.