The Fed's hawkish June meeting sent short-end yields surging, with markets now pricing a near-certain September hike and a gradual tightening cycle extending into early 2027 around 4%.
Short-end Treasury yields, the segment of the curve most sensitive to Federal Reserve policy expectations, spiked on Monday as markets reopened following the extended Juneteenth holiday weekend.
How 2-Year Has Reacted
The 2-year Treasury note yield jumped more than 17 basis points on Wednesday in the aftermath of the June 16-17 Fed meetings outcome, which was qualified as hawkish by the market participants. After a pullback from these levels, yields have resumed their climb. In early New York session on Monday, the two-year note yielded 4.226%, the highest since February 2025.
Between September 2024 — when the Fed began policy easing —, and last week, the 2-year Treasury yield had risen 64 basis points (bps) in total, as the market fully reversed its easing expectations. The 64-bps rise in the 2-year happened against the grain of an active easing cycle, with the move implying that the market was fighting the Fed's own stated direction.
2-Year Yield Climbs Back Above 4.2%
Source: TradingView
Market-Hike Pricing
The latest Fed funds futures and CME FedWatch data suggest markets are increasingly pricing in a more hawkish Fed policy path over the next several meetings.
- While the July meeting is still expected to result in no change, with a 63.7% probability that rates remain in the 3.50%-3.75% range, markets assign a meaningful 36.3% chance of a 25-basis-point hike.
- By September, the probability of rates rising to 3.75%-4.00% jumps to more than 93%, indicating investors largely expect at least one rate increase by then.
- Expectations continue to firm further out, with the October meeting showing a 24.3% probability of rates reaching 4.00%-4.25%,
- The December meeting assigns nearly a 70% chance to that range.
- Looking into 2027, futures imply rates are likely to peak around 4.00%-4.25%, with the January and March meetings showing probabilities above 90% for that range.
- Overall, the curve points to markets anticipating a gradual tightening cycle extending into early 2027 before rates stabilize near 4%.
CME FedWatch Tool Aggregate Rate Expectation Odds (as of June 22, 2026)
Source: FedWatch Tool
The Warsh Wild Card
Warsh complicated the read by declining to submit his own dot in the rate projections. "I did not submit a dot for me," he said, adding "It's not helpful in the conduct of policy." This means the market has to interpret his intentions from his words and actions, and not his forecasts, adding uncertainty premium to the front end. The dots showed nine members expect at least one hike this year.
The scaled-down post-meeting policy statement removed its easing bias and focused on above-target inflation.
June Meeting Dot-plot Chart
Source: Federal Reserve
And the Summary of Economic Projections (SEP) showed a sharp increase to the core inflation estimate for the year.
What Futures Traders Should Watch Next
Thursday’s May core price consumption expenditure (PCE) scheduled to be released as part of the Bureau of Labor Statistics’ personal income and spending report is the next major catalyst futures traders are bracing for. Here’s where expectations stand now
May PCE Inflation Consensus Expectations
Source: Morgan Stanley research note
Given the Fed’s hawkish pivot, the upcoming core PCE, called the central bank’s preferred inflation gauge, carried extra weight.
Tuesday’s S&P Global flash purchasing managers’ index (PMIs) will also have ramifications for interest rates. Any softening in the composite or manufacturing readings could ease rate hike fears, while a solid print would reinforce the view the economy can absorb tighter policy.
The next FOMC meeting is scheduled for July 28-29, although the dot plot will be released only along with the September policy statement. The 2-year yield will remain acutely sensitive to every data print between now and then.
For traders, the key plays in this environment are:
Shorting short-term Treasury futures (ZT/ZN), i.e. betting that 2-year and 10-year note prices fall further as yields rise. When the market expects rate hikes, bond prices drop, so shorts profit.
SOFR futures strips: The Secured Overnight Financing Rate (SOFR) futures contracts lined up by maturing data and viewed together as a curve or a strip, signals that traders are pricing in additional Fed rate hikes ahead. If this view proves correct, short-end Treasury yields could continue to rise, while sectors that benefit from lower rates may face renewed headwinds.
- If SOFR futures prices continue falling (implied rates rising), the market is pricing more hikes.
- If SOFR futures prices rise (implied rates falling), the market is pricing fewer hikes or earlier cuts.
Curve plays: Because short-term yields are rising faster than long-term yields, the gap between the two ends of the curve is razor thin. Rather than betting on whether interest rates as a whole will rise or fall, traders can focus on the spread between short- and long-term Treasury yields. If they expect the Fed to remain aggressive, they may position for a flatter curve as short-term yields rise faster. If they believe the tightening cycle is nearing its end, they may position for a steeper curve as the gap between short- and long-term yields widens.