Investors pivot to shorter-dated US Treasury bonds amid Fed inflation bets

The bond market is placing a very specific bet right now. Investors are piling into short-dated US Treasuries, particularly two-year notes, betting that the Federal Reserve under Chair Kevin Warsh has both the will and the tools to bring inflation back under control. What just happened in the Treasury market The Fed raised the federal funds target range to 3.75–4% on September 16, marking its first rate increase since July 2023. The market’s immediate response was sharp. Two-year Treasury yields surged to nearly 4.75%, a level that reflects just how seriously investors are taking the Fed’s commitment to tighter policy. Futures markets are now pricing in roughly an additional 80 basis points of tightening over the next year. The catalyst for all this confidence traces back to August, when Warsh used the Jackson Hole symposium to deliver an unmistakably hawkish message. The data backs up the urgency. The Consumer Price Index rose 3.4% year-over-year in August, still well above the Fed’s 2% target. Core CPI, which strips out volatile food and energy prices, came in at 2.4% annually. The month-over-month headline reading was 0.4%. Why short-term bonds are winning the popularity contest...