Bond traders are bracing for heightened market volatility as new Federal Reserve Chair Kevin Warsh shifts away from forward guidance, leaving markets to interpret economic data independently.

In his first press conference, Warsh stated that financial markets “perform best when they react to incoming data,” rather than overanalyzing the central bank’s explicit policy hints. Analysts view this tactical shift as a major regime change. Guneet Dhingra, head of U.S. rates strategy at BNP Paribas, warned that an unpredictable Fed forces traders to price in a higher risk of unexpected or earlier rate hikes, which could ultimately drive up long-term borrowing costs.

This unpredictability directly impacts mainstream consumers, as bond market swings dictate mortgage rates. Strategy experts expect the benchmark 10-year U.S. Treasury yield to remain “range-bound” between 4.25% and 4.7%. While stable, this range is notably higher than pre-Iran war levels, meaning 30-year fixed mortgages will likely hover near 6.5%.

The Fed’s policy path remains tethered to a resilient U.S. economy. May data showed employers added 172,000 jobs, while consumer prices rose by over 4%—double the Fed’s 2% target. Although oil prices have plunged following eased geopolitical tensions, economist Ed Yardeni noted that the AI spending boom continues to drive up electricity bills and electronics prices, preserving a core inflation problem.

Consequently, Fed forecasts have leaned hawkish, with half of the officials anticipating a rate hike in 2026. However, Morgan Stanley’s Michael Gapen suggests these projections may not yet account for upcoming disinflationary forces, such as falling airfares and the reopening of the Strait of Hormuz, which could allow the Fed to hold steady through year-end. Still, market risks remain firmly skewed to the upside.

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Source: https://www.investopedia.com/what-to-expect-from-the-bond-markets-in-the-second-half-12009235