Goldman Sachs Interprets Powell's "Hawkish Debut": Two-year US Treasury bond volatility may soar again, long end welcomes a calm window

Kay Haag, Global Head and Chief Investment Officer of Fixed Income and Liquidity Solutions at Goldman Sachs Asset Management, pointed out that the statements made by Kevin Wash, in his first policy meeting as Federal Reserve Chair, are likely to exacerbate volatility in the short end of the US Treasury bond market, but at the same time help stabilize price fluctuations in the long end. Haag stated that Wash sent a "decisively hawkish signal" that took the market by surprise - he explicitly prioritized short-term inflation resistance. Traders consequently increased their bets, expecting policymakers to raise interest rates earlier than previously estimated. According to compiled data, investors now believe there is over an 80% likelihood of a rate hike at the Federal Open Market Committee (FOMC) meeting in September, and have fully priced in the expectation of at least one hike in October. Prior to this week, traders believed the chances of a rate hike before December were slim. Haag said in an interview on Thursday, "Volatility in the two-year Treasury market will significantly increase over the next two years. This is due to the market's focus on inflation expectations, as well as influences from the stabilization of the long end and the flattening of the yield curve. In addition, many statements from the Federal Reserve regarding forward guidance suggest that guidance will weaken in the future and policy will rely more on data, factors that could high volatility in two-year yields." As a barometer for market expectations of Federal Reserve policy, the two-year US Treasury yield soared after the FOMC decision was announced, and continued to fluctuate on Thursday. The yield surged by 13 basis points at one point on Wednesday, marking the largest single-day increase since April 2025, and matching the largest increase on a Fed decision day since 2008. Meanwhile, the 30-year US Treasury yield touched a two-month low on Thursday. Ahead of the Wednesday meeting, Wall Street generally believed that the Fed had completed its rate cuts in response to heightened inflation pressures from the Iran conflict. However, investors were also concerned whether Wash would compromise with Trump - especially since Trump appointed Wash only after publicly criticizing former Chair Powell for not cutting rates enough. Haag believes that Wash's clear statement to bring inflation back to the 2% target level, along with the potential impact of his new communication style, could strengthen further. The Federal Reserve has set up five working groups to conduct comprehensive reviews, from economic forecast data to policy implementation, which could provide support for policy credibility. Haag pointed out that these factors combined could help reduce price fluctuations in long-end yields. "The design of these working groups is clearly aimed at reevaluating the overall operating model of the Federal Reserve," Haag said. "The subsequent effects remain to be seen, but it is highly likely to reduced volatility in the long end, which in our view, will make long-end assets more attractive to investors."