The U.S. bond market holds its breath! Powell's confirmation hearing may reveal the Federal Reserve's policy path.

As bond traders become increasingly optimistic about the prospect of the end of the Middle East conflict, they believe the next key catalyst will come from Capitol Hill - at which time, Kevin Warsh will appear before the Senate confirmation hearing as the nominee for Federal Reserve Chairman nominated by President Trump. Last week, the brief reopening of the Strait of Hormuz and the prospect of resumed peace talks between the US and Iran pushed US Treasury yields higher, as traders raised their expectations for a rate cut by the Federal Reserve by the end of the year. During the period when war caused oil prices to surge, the yield on the US 2-year Treasury briefly exceeded the upper limit of the Federal Reserve's current benchmark rate range of 3.75%, but has now fallen back below that level as oil prices have dropped. Priya Misra, portfolio manager at J.P. Morgan Asset Management, said last Friday's significant volatility was "reasonable, as the rate market had previously been pricing in higher energy prices, which would limit the Fed's room for action in the face of inflation above the target level." The institution has recently been increasing its allocation to long-term securities sensitive to inflation in its portfolio, saying "if oil prices continue to fall, the market can start pricing in a gradual rate cut by the Federal Reserve." Although the situation in the Middle East continues to influence the movement of US Treasury bonds - including the new uncertainty surrounding the Strait of Hormuz over the weekend - the Senate confirmation hearing for Warsh on Tuesday also has the potential to shake the market. Short-term US bond yields are returning to near the key Federal Reserve policy rate Just before the US launched attacks on Iran at the end of February, US Treasury yields had been rising, in part because the market expected Warsh - who had expressed support for lowering rates before being nominated by Trump at the end of January - to push for monetary policy easing at the Federal Reserve later this year. If he continues to show a preference for sticking to this stance and ignores the war-driven energy shocks, it could further strengthen the market's bets on a rate cut and boost short-term Treasury bonds that are sensitive to interest rates. However, if he expresses caution about inflation, it could trigger a market reversal. Morgan Stanley strategists including Michael Gapen and Lingdi Xu said, "A key question for the market is how far Warsh will push for a rate cut." Returning to calm After the surge in yields driven by rising oil prices in the early stages of the war, US Treasury yields have been range-bound in recent weeks. Ceasefires and an increase in expectations for a peace agreement have eased the previous downward trend in US Treasury yields, bringing the yield on the 10-year Treasury back below around 4.25%. At the same time, volatility...