Hawkish Federal Reserve combined with geopolitical conflicts, upward pressure on U.S. Treasury yields remains difficult to alleviate

Ask AI · How does the Federal Reserve’s hawkish policy reshape market interest rate cut expectations?

Since mid-March, the dual push of the Federal Reserve’s hawkish policy signals and the escalation of geopolitical conflicts in the Middle East has not only driven international oil prices to a nearly four-year high but has also led the market to completely abandon bets on the Fed cutting rates in 2026. Dongfang Jincheng analyzes that against the backdrop of inflation narratives dominating the market and geopolitical uncertainties, U.S. Treasury yields are likely to rise in the short term, and the deeply inverted U.S.-China interest rate differential will persist.

Dongfang Jincheng points out that the Federal Reserve’s March meeting became a key turning point for U.S. Treasury trends, with the policy focus clearly shifting to addressing inflation risks. The latest dot plot indicates that there is only one potential interest rate cut remaining in 2026, with a very high threshold for its realization. Powell emphasized that interest rate cuts would only be initiated after substantial progress in reducing inflation, a statement that directly reversed market expectations and even led to the emergence of pricing for rate hikes. Dongfang Jincheng further states that the intensive speeches by Federal Reserve officials this week are likely to maintain a hawkish tone, further strengthening the market’s judgment of “slow rate cuts, no rate cuts,” which provides core support for the upward movement of U.S. Treasury yields from a policy perspective.

At the same time, the ongoing escalation of geopolitical conflicts in the Middle East is transmitting pressure from commodities to inflation, becoming another important factor in pushing up U.S. Treasury yields. Dongfang Jincheng analyzes that the repeated attacks on key energy facilities by Israel and Iran, along with the ongoing tensions in the Strait of Hormuz, have directly driven Brent crude oil prices to a nearly four-year high. Trump’s statement of “not wanting a ceasefire” has led the market to expect that the conflict will be difficult to calm in the short term. Dongfang Jincheng believes that high oil prices will become the norm, and the subsequent upward pressure on inflation will continue to ferment, further pushing up U.S. Treasury yields.

From the market performance perspective, the 10-year U.S. Treasury yield exhibited a volatile trend of first declining and then rising, significantly affected by factors such as oil prices, U.S. Treasury issuances, and policy signals. Ultimately, on March 20, it rose sharply by 14 basis points to 4.39%, accumulating an increase of 11 basis points from the previous Friday. Data monitored by Dongfang Jincheng shows that yields on U.S. Treasuries of various maturities generally rose, with the short end rising significantly more than the long end, as the 2-year Treasury yield rose by 15 basis points and the 3-year by 16 basis points, while the 20-year and 30-year yields only rose by 8 basis points and 6 basis points, respectively. Dongfang Jincheng points out that the 10Y-2Y U.S. Treasury yield spread narrowed by 4 basis points to 51 basis points, reflecting market concerns about short-term inflation and policy tightening.

Regarding the U.S.-China interest rate differential, as of March 20, the 10-year U.S. Treasury yield rose by 11 basis points, while the 10-year Chinese Treasury yield only slightly increased by 2 basis points, thus widening the inversion of the U.S.-China 10-year government bond yield differential by 9 basis points to 256 basis points. Dongfang Jincheng assesses that in the short term, the 10-year U.S. Treasury yield is still under upward pressure supported by policy and geopolitical factors, and there is also a slight possibility of an upward movement in the 10-year Chinese Treasury yield. The divergence in their trends will make it difficult to alleviate the deeply inverted state of the U.S.-China interest rate differential.

Dongfang Jincheng concludes that the current market has entered a phase dominated by inflation narratives, and the hawkish policy tone of the Federal Reserve is unlikely to change in the short term. The uncertainty of geopolitical conflicts in the Middle East remains, and under these dual factors, the upward trend of U.S. Treasury yields is clear and difficult to reverse. For the U.S.-China interest rate differential, the difference in the upward rhythm of yields will be crucial, and the deep inversion pattern will continue in the short term, which will also become an important reference factor for cross-border capital flows and exchange rate trends.