Bond yields just saw their biggest surge since 2022 as expectations grow for more Fed rate hikes

By Joy Wiltermuth

Fed Chair Warsh's quiet style of communicating interest-rate policy has led to more volatile markets

Fed Chairman Kevin Warsh has advocated for a less talkative Fed that responds more to the market.

The part of the Treasury market that's most sensitive to changes in Federal Reserve interest rates just logged its biggest four-session yield jump since the central bank's epic hiking cycle of 2022.

The policy-sensitive 2-year Treasury yield BX:TMUBMUSD02Y surged 38.8 basis points over the past four trading sessions - not counting Wednesday, when the bond market was closed for Veterans Day - to 4.862% on Thursday. One basis point is 0.01 percentage point.

That was the biggest four-session climb since June 15, 2022, according to Dow Jones Market Data. At that time, the Fed was embarking on the fastest increase of its short-term policy rate since 1987 in a bid to quell surging inflation.

"This is really just a function of the market repricing Fed expectations," said Gennadiy Goldberg, head of U.S. rates strategy at TD Securities. "And a more hawkish Fed in the months to come."

The sudden jump in yields followed the U.S. midterm elections, hot inflation and labor-market reports for October and a suggestion Tuesday from Fed governor Chris Waller that a half-percentage-point rate hike might be warranted in December.

Traders on Thursday were pricing in higher chances of a pair of Fed rate hikes through January, but also a higher "terminal" policy rate of 4.82%, versus 4.44% a few days ago, Goldberg said.

The Fed raised rates for the first time in three years in September, bringing its policy rate to a range of 3.75% to 4%. Hikes that began in early 2022, starting from a range of zero to 0.25%, pushed the upper limit of the Fed's policy range to as high as 5.5% in 2023 and 2024.

Fears that higher rates would throw the U.S. economy into a recession never materialized, but the rate shock was at the core of the collapse of Silicon Valley Bank and the short-lived regional-banking crisis of 2023.

Rates have been very volatile under under Chairman Kevin Warsh, who took over the post in May. He has advocated for a less talkative Fed that responds more to the market. Next year, there will be one fewer Fed rate meeting as part of his strategy.

The 10-year Treasury yield also jumped above 5% on Thursday, an important psychological threshold that also can hurt stocks. The S&P 500 SPX, Dow Jones Industrial Average DJIA and Nasdaq Composite COMP ended lower Thursday, with tech stocks falling after the resignation of Nvidia (NVDA) CEO Jensen Huang.

Related: Nvidia's stock sinks after CEO Jensen Huang's resignation - live updates

-Joy Wiltermuth

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11-12-26 1716ET