Six-Month Treasury Yield Rises to 4%: Bond Market Tells the Fed to Get on with the Rate Hikes

Even banks are raising the yields on their brokered CDs to 4% and over. The coming rate hikes are getting real for investors.

By Wolf Richter for WOLF STREET.

The government sold $84 billion of 6-month Treasury bills at an “Investment Rate” of 3.97% at the Treasury auction this week, up from 3.80% at the auction two weeks ago.

In the secondary market, over those two weeks, the 6-month Treasury yield also spiked by 17 basis points, closing on Thursday at 3.97%, after closing at 4.0%+ in the prior two days, according to Treasury Department data. The last time the six-month yield was in this range was in early September before the three rate cuts by the Fed.

Since early January, the six-month yield has surged by nearly 50 basis points, from being below the Effective Federal Funds Rate (EFFR, blue line) which the Fed targets with its policy rates, to being 35 basis points above the EFFR, indicating that the bond market expects – and is clamoring for – more than one rate hike within the window of the 6-month yield, which would be less than six months.

The government sold $98 billion of 3-month Treasury bills at an “Investment Rate” of 3.83% at the Treasury auction this week, up from 3.73% at the auction two weeks ago.

In the secondary market, the 3-month Treasury yield closed at 3.82%, 19 basis points above the EFFR, after going as high as 3.87% (24 basis points above the EFFR) in the prior days, according to Treasury Department data.

So even in this short window of less than three months, the bond market, reacting to incoming data, is now seeing a reasonable chance of a rate hike.

The 1-year Treasury yield has been near or above 4.0% for the past two weeks, about 60 basis points higher than where it had been at the beginning of February. Over this period of five months, the 1-year yield showed how the bond market flipped from still seeing rate cuts this year to seeing rate hikes.

There was no 1-year T-bill auction this week; that will happen next week.

Banks have been ratcheting up the offered yields of “brokered CDs” that they sell via stock brokers to retail investors that are not their own customers. Many of the CD yields have moved above 4% recently. They’re competing with T-bills. And they’re seeing the incoming data, and they know what they need to do to attract investors’ cash: higher yields.

Fed Chair Warsh has been exhorting the bond market over and over again to watch the data, not the Fed. Markets are excellent at interpreting the data, and they should focus on that, and not on the Fed, he said, and that’s important for the Fed, he said, because the Fed wants to use the bond market as one of the key data inputs, and if the bond market reacts to what it thinks the Fed will do, instead of reacting to the data, then the Fed’s input from the bond market would be polluted by this circular expectation.

There has been lots of resistance at the Fed to hiking rates, but that resistance is fading: at the June 17 FOMC meeting, 9 of the 19 FOMC members projected at least one rate hike this year (with Warsh not disclosing his projections). And the bond market is telling the Fed: get on with it.

The 2-year Treasury yield, which has been providing a fairly reliable signal for the Fed of how the bond market interprets the incoming data, has surged by 76 basis points since early February, to 4.14%.

The bond market is clearly telling the Fed that the incoming data calls for multiple rate hikes, whether the Fed wants them or not.

The 10-year Treasury yield rose by 11 basis points during the week to 4.49%. Compared to two weeks ago, it’s up by 2 basis points. It has been in this 4-5% range since 2023.

This longer end of the bond market is focused on the imagined path of inflation in future years, how lax or aggressive the Fed might be in dealing with this inflation, and on the stream of Treasuries that the government will issue to fund the ballooning deficits that the market has to absorb, which may require higher yields to attract ever more investors.

It wasn’t until the Fed announced the end of QE in late 2021 that the 10-year yield began to surge, ending the 40-year bond bull market, but lagged way behind inflation, which hit 9% by 2022.

Compared to the decades before QE, before 2009, the 10-year yield at this 4.5% range is still relatively low. And compared to 4.25% CPI inflation, the 10-year yield is very low. The bond market is still counting on inflation to go back into the 2%-bottle.

Higher bond yields in the market mean lower bond market prices for existing holders, and vice-versa.

The 30-year Treasury yield rose by 11 basis points during the week to 4.98%, roughly unchanged from two weeks ago.

The long-term bond market completely blew off the Fed’s rate cuts; they didn’t even register.

Two trend lines for entertainment only: The dotted line depicts the linear trend for the data in the chart. The double line is my imaginary trend line of lows since late 2023, and it still holds.