Calm Before the Storm? Powell Could Shake Up the U.S. Bond Market

At first glance, the U.S. bond market looks unusually calm. Volatility has fallen to its lowest levels since the pandemic, yields are moving within a narrow range, and investors are enjoying a rare sense of stability. But that calm could shatter in a single sentence — when Federal Reserve Chair Jerome Powell speaks today after the FOMC meeting.

Calm on the Surface, Tension Underneath The 10-year Treasury yield held near 3.98% in Asia, while the 2-year yield hovered around 3.49%. Markets have already priced in another rate cut expected by July.

But analysts warn that if Powell sounds even slightly hawkish, yields could quickly jump above 4%, driving up borrowing costs across the economy — from mortgages to corporate debt. “The market has already priced in much of what the Fed might do. Any deviation could push yields up 25 to 30 basis points,” said Scott DiMaggio, head of fixed income at AllianceBernstein.

He added that technical levels suggest 10-year yields could climb to 4.25% if sentiment shifts.

Silence Fueled by Missing Data With the U.S. government shutdown halting the release of fresh economic data, traders have little to react to.

The ICE BofA MOVE Index, which tracks Treasury market volatility, has dropped to levels last seen during the pandemic. “In a market this quiet, a single unexpected comment from the Fed could reignite volatility overnight,” said David Chao of Invesco Asset Management.

Investors Seek Balance The labor market is cooling, but inflation remains above target — leaving Fed policymakers divided. Some favor additional cuts, others prefer to hold steady. Neil Sutherland of Schroders expects economic growth to accelerate next year but still sees lower yields as the path of least resistance. “We believe the bias remains toward lower, not higher, yields,” he said. Yields near 4% are also attracting buyers looking for stability — especially as U.S.–China trade tensions continue to dampen risk appetite.

An Unusual Yield Curve Cycle Since the pandemic, the U.S. economy has faced shock after shock — surging inflation, aggressive tightening, a regional banking crisis, trade conflicts, and now a government shutdown. Yet it continues to grow at nearly 4% annually, according to the Atlanta Fed’s GDPNow model. Professor Campbell Harvey of Duke University, who first linked yield curve inversions to recessions, believes this time could be different. “Massive fiscal spending and AI-driven investment make this cycle unlike anything in modern history,” Harvey said. Historically, recessions followed about 11 months after an inversion. But that hasn’t happened yet. “The yield curve has predicted eight of the last nine recessions,” Harvey noted. “If it fails this time, it will be its first false signal in decades.”

Summary The U.S. bond market may appear calm, but beneath the surface lies tension. One remark from Jerome Powell could flip sentiment and send yields soaring.

While traders hope for continued rate cuts, markets are bracing for the possibility that Powell’s tone could turn today’s calm into tomorrow’s storm.

#FederalReserve , #Powell , #FOMC‬⁩ , #volatility , #Fed

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