The Treasury market witnessed a record surge in futures trading, with more than 500,000 contracts changing hands, as bond traders placed significant wagers on the Federal Reserve increasing interest rates at its next meeting in July. This volume is approximately four times the 20-day average and comes after Kevin Warsh's debut as Fed chair. This activity suggests market participants are anticipating a more hawkish stance from the central bank.
This increased speculation around a July rate hike follows robust economic data, including stronger-than-expected job growth in May. Earlier in June, bond traders fully priced in a Federal Reserve interest-rate hike by the end of 2026 after US job growth surpassed all forecasts. Two-year yields, highly sensitive to Fed policy changes, surged by as much as 13 basis points to 4.17%, recording their largest one-day increase since April of the previous year. Interest-rate swaps indicate that traders anticipate a quarter-point Fed hike by the December policy meeting, with a roughly 60% chance of such a move in October.
Despite the significant futures trading suggesting a potential July hike, other market indicators present a mixed picture. Polymarket, a prediction market, shows that traders are pricing a July Fed rate hike at only 17.5% probability, while an 80.5% probability is assigned to no change. This disparity exists even as core Personal Consumption Expenditures (PCE) inflation, the Fed's preferred inflation measure, reached 3.4% in May, the highest since October 2023. Federal Reserve officials like Neel Kashkari and Austan Goolsbee have vocalized concerns about inflation and the need for rate hikes. Some analysts attribute the low Polymarket probability to the new Fed Chair, Kevin Warsh, potentially preferring to signal a September hike rather than surprising markets in July.
