Yields Surge Past Milestones — Fed Rate-Cut Plans in Jeopardy
By John Nada·May 17, 2026·2 min read
Bond yields surge past key levels, challenging Fed's rate-cut plans under Kevin Warsh. Inflation stoked by Iraq war pressures traders and markets.
The CME Group FedWatch Tool pushed the probability of a quarter-point rate hike this year to 50% on May 15, a clear signal of shifting market expectations. Just a day earlier, these odds were 40%, as reported by Yahoo Finance. Bond traders' maneuvers are sending a decisive message to incoming Fed Chair Kevin Warsh, casting doubt on his intentions to lower interest rates, a strategy in line with President Donald Trump’s demands.
But it's not just the betting odds that are changing. The 30-year Treasury yield has climbed above 5% this week, with the 10-year yield reaching 4.5% for the first time since June 2025, highlighting an environment of rising inflation concerns. The two-year yield breached the 4% mark, a level unseen for 11 months.
War has its costs, and the ongoing conflict in Iraq since late February has stoked inflation fears. Bond traders have been bracing for these risks, and their preparations suggest a potential need for the central bank to raise rates sooner than expected.
Inflationary pressures are mounting. Data from the Bureau of Labor Statistics showed the April Producer Price Index jumping 6% year-over-year, a leap not seen since 2022. Consumer costs surged as well, with the April CPI rising to 3.8% on a yearly basis, outpacing wage growth for the first time in three years.
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Energy remains a key driver of these price hikes. Since the Iraq war began, energy prices have soared by 17.9% year-over-year. Gasoline prices shot up by 28.4%, and fuel oil prices jumped an eye-watering 54.3%.
The Bureau of Economic Analysis underscored this trend with the March 2026 Personal Consumption Expenditures report. Headline PCE rose to 3.5% year-over-year, driven largely by energy costs, while Core PCE, excluding food and energy, ticked up to 3.2%.
"Risk sentiment is being dented by a global rise in bond yields," Angelo Kourkafas, senior global investment strategist at Edward Jones, told Bloomberg. He cited inflation fears, central-bank hike expectations, and concerns over government debt as countries address higher energy prices as key factors driving current market movements.
As bond yields continue their upward trajectory, the Federal Reserve's path seems increasingly fraught with obstacles. While the stock market may revel in its exuberance, the bond market tells a story of caution and recalibration.