Tom Lee: Oil prices have cooled off! Yield rates take over as the main reason for the downturn, Bank of America calls for three rate hikes.

BitMine Chairman and Fundstrat Co-founder Tom Lee shared his macro observations this week: Oil prices have fallen over the past week, the war risk premium is contracting, but the 10-year U.S. Treasury yield is still rising, currently around 4.5%, higher than the pre-conflict level of 4.2%. His core judgment is that the market's recent main headwind has shifted from oil prices to yields. Federal funds futures are now nearly pricing in two rate hikes within the year, while Bank of America expects three rate hikes, in September, October, and December respectively. All of this comes after the Fed's new Chair Kevin Warsh issued a "higher rates" signal at his first press conference.

(Background: New Fed Chair Warsh's debut shocks the market! Traders bet on a September rate hike, with the possibility of "two rate hikes" by year-end)

(Context supplement: U.S. Treasury bond 5% defense line completely broken! Bank of America screams 'doomsday,' Goldman Sachs shouts 'buy,' Japan directly sells big)

Table of Contents

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• War risk premium cools off, but bond market headwinds take over
• Market shifts from pricing in rate cuts to pricing in two rate hikes
• Gundlach's 2-year signal has reversed

Key Takeaways

• Tom Lee's judgment: Market headwind has shifted from oil prices (falling back near pre-conflict $65) to the 10-year U.S. Treasury yield (currently around 4.5%, higher than pre-war 4.2%)
• Federal funds futures nearly price in two rate hikes within the year; Bank of America goes further, predicting 25 basis point hikes in September, October, and December, totaling three
• Jeffrey Gundlach's tracked 2-year U.S. Treasury yield signal has reversed, meaning the Fed would need to hike rates twice to catch up with market pricing

The new Fed Chair Kevin Warsh's first press conference has prompted the market to start repricing. After last week's FOMC meeting, Kevin Warsh kept rates unchanged but sent a "future rates will be higher" signal. Nine of the 18 committee members advocated for a rate hike this year, with six of them favoring two rate hikes this year.

And today, BitMine Chairman Tom Lee defines the current macro structure: the lead role has shifted to U.S. Treasury yields.

War Risk Premium Cools Off, but Bond Market Headwinds Take Over

Over the past week, oil prices have continued to fall, now not too far from the pre-conflict level of around $65. The war risk premium is contracting, indicating that the market's pricing of related geopolitical risks has clearly cooled.

But pressure on the other side hasn't subsided. The 10-year U.S. Treasury yield is currently around 4.5%, higher than the pre-war level of 4.2%, and still rising. Oil cools, yields take over – that's the most critical role change in this week's macro playbook.

Market Shifts from Pricing in Rate Cuts to Pricing in Two Rate Hikes

Tom Lee points out that the market is not only watching the 10-year yield but also pricing in the potential need for the Fed to hike rates. Based on federal funds futures, the market is now almost fully pricing in two rate hikes within the year. The market was previously betting on the Fed cutting rates; now it has started seriously pricing in even two rate hikes – the shift in direction has been quite rapid.

Bank of America goes further. Chief U.S. Economist Aditya Bhave changed his tune this week, upgrading his full-year forecast from "stay put" directly to three rate hikes, timed in September, October, and December, each of 25 basis points, raising the federal funds rate from the current 3.5%-3.75% to 4.25%-4.5%. BofA's rationale is that employment is stronger than expected, inflation is sticky, and energy prices are rising, stating outright that "the Fed's inflation problem has clearly worsened."

Yields have become the market's main headwind for now, at least in the near term. Jeffrey Gundlach's 2-year view is being validated.

Gundlach's 2-Year Signal Has Reversed

DoubleLine founder Jeffrey Gundlach, the "new bond king," has always emphasized that the key is not the 10-year but the 2-year U.S. Treasury yield, as it typically leads Fed actions and is the most reliable leading indicator of policy direction.

Between 2023 and 2025, the relationship between the 2-year yield and the federal funds rate indicated that Fed policy was "overly tight," suggesting the need for rate cuts; but recently this relationship has reversed, meaning the Fed now needs to hike rates twice to catch up with the 2-year yield level. This signal's directional shift is one of the core bases for the recent repricing in the rate market.

One rate hike equals 1 quarter point (25 basis points), two hikes equal 50 basis points – a full two-quarter-point tightening path. For liquidity-sensitive assets, this pace is not easy. The issue in this macro scenario is not whether to hike rates, but how far the rate hike path will go.

Common Questions

Why is a rise in U.S. Treasury yields a headwind for the market?

A rise in yields means higher borrowing costs for funds, reducing the relative attractiveness of risk assets like stocks and crypto assets. A 10-year U.S. Treasury yield increase from 4.2% to 4.5% means the market demands higher returns to take on risk, with funds tending to flow back into bonds or cash, creating selling pressure on risk assets.

How many rate hikes will the Fed carry out this year? What are the forecasts from various institutions?

Currently, federal funds futures are nearly pricing in two rate hikes within the year. Bank of America this week upgraded its forecast from zero to three hikes, in September, October, and December, each of 25 basis points, raising the target rate from 3.5%-3.75% to 4.25%-4.5%. New Fed Chair Kevin Warsh's first press conference has already issued a higher rates signal.