According to Zhitong Finance APP, as bond traders become increasingly optimistic about the prospects of the Middle East conflict ending, they believe the next key catalyst will come from Capitol Hill—where Kevin Warsh will be questioned at a Senate hearing as the Federal Reserve Chair nominee put forward by President Trump.
Last week, the brief reopening of the Strait of Hormuz and the potential resumption of peace talks between the U.S. and Iran drove U.S. Treasury prices up, with traders raising expectations for a rate cut by the Federal Reserve before the end of the year. During the surge in oil prices triggered by the war, the yield on the U.S. 2-year Treasury note briefly exceeded the current upper limit of the Federal Reserve's benchmark interest rate range of 3.75%, but has since fallen back below that level as oil prices have retreated.
Priya Misra, a portfolio manager at JP Morgan Asset Management, stated that the significant volatility last Friday &#34;is reasonable, as the interest rate market was previously pricing in higher energy prices, which would limit the Federal Reserve's room for action in the context of inflation being above target.&#34; The firm has recently been increasing its allocation to long-term securities sensitive to inflation in its portfolio, stating that &#34;if oil prices continue to decline, the market can begin to price in gradual rate cuts by the Federal Reserve.&#34;
Although the situation in the Middle East continues to affect the trajectory of U.S. Treasuries—including new uncertainties surrounding the Strait of Hormuz over the past weekend—the Senate confirmation hearing for Warsh on Tuesday also has the potential to shake the market.
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Short-term U.S. Treasury yields are returning near the Federal Reserve's key policy rate.
Just before the end of February, prior to the U.S. attack on Iran, U.S. Treasuries were already rising, partly due to market expectations that Warsh—who expressed support for lowering interest rates before being nominated by Trump at the end of January—might push the Federal Reserve to ease monetary policy later this year.
If he shows a continued inclination to maintain this stance and ignores the war-driven energy shocks, it could further strengthen market bets on rate cuts and boost demand for interest rate-sensitive short-term Treasuries. However, if he expresses caution regarding inflation, it could trigger a market reversal. The Morgan Stanley strategist team, including Michael Gapen and Lingdi Xu, stated: &#34;A key question for the market is how much Warsh will push for rate cuts.&#34;
Tending Towards Calm
After the initial surge in oil prices drove yields up at the beginning of the Middle East war, U.S. Treasury yields have entered a range-bound fluctuation in recent weeks. The ceasefire and rising expectations for a peace agreement have alleviated the previous decline in U.S. Treasuries, bringing the yield on the U.S. 10-year Treasury note back down to around 4.25%. Meanwhile, volatility has continued to decline, with an indicator measuring the level of turmoil in the bond market essentially retreating to pre-war levels.
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Volatility in the U.S. Treasury market has retreated after surging in March
During the peak of the conflict, the market completely eliminated expectations for a Federal Reserve rate cut in 2026. As of last Friday, the interest rate swap market indicated a roughly 50% probability of a rate cut by the Fed before the end of the year. However, this is still significantly lower than the market's pre-conflict expectation of more than two rate cuts.
In this context, bond investors will closely watch whether the Fed under Walsh prioritizes inflation over employment. Some investors believe that with inflation already above the Fed's 2% target, rising oil prices mean there is reason to keep interest rates elevated for a longer period, even if inflationary pressures ease.
Jack McIntyre, a portfolio manager at Brandywine Global Investment Management, stated, &#34;Unless there is a negative surprise in employment, the Fed should remain on hold for the remainder of this year.&#34; He added, &#34;If Walsh sends strong dovish signals right upon taking office, but there are not many supporters on the policy committee, that won't look good.&#34;
Hawkish or Dovish?
George Catrambone, head of fixed income at DWS Americas, noted that Walsh has pointed out that rising productivity supports lower interest rates, but his &#34;inflation hawk&#34; reputation established during his tenure as a Fed governor from 2006 to 2011 suggests he will not overlook inflation factors. George Catrambone stated, &#34;He will be very focused on inflation, which is exactly what the market wants to hear.&#34; He is more optimistic about shorter-term U.S. Treasuries, such as the two-year note, which still yields above the effective federal funds rate.
Wells Fargo strategists also warned that Walsh's statements during the hearing &#34;could easily break the market's current perception of him as dovish,&#34; pointing out that the options market has underestimated the potential volatility risk before and after the hearing, which could lead to sharp fluctuations in U.S. Treasury yields.
Brendan Fagan, a macro strategist at Markets Live, stated, &#34;Ideally, a Fed led by Walsh would reinforce downward pressure on terminal rate expectations, supporting duration assets and interest rate-sensitive assets in the medium term. However, in the short term, persistent inflationary pressures may keep short-end yields elevated and limit the pace of any steepening of the yield curve, especially if upcoming data does not meet the high thresholds required to support deeper rate cuts.&#34;
Brij Khurana, a portfolio manager at Wellington Management, pointed out, &#34;Walsh's past positions have been relatively hawkish. Recently, he has focused more on productivity and lower interest rates. The hearing will provide some clear signals.&#34;
Brian Quigley, a senior portfolio manager at Vanguard, stated that the company increased its holdings of U.S. Treasuries with maturities of 2 to 10 years during last month's peak in yields. He said, &#34;As long as you are confident that the Fed is unlikely to raise rates, holding two-year Treasuries is very attractive.&#34; He added that whether the conflict is resolved or escalates, Vanguard's moderate overweight in U.S. Treasuries with maturities of 10 years or less is feasible
Weighing Risks
Last week, several Federal Reserve officials expressed cautious views on the outlook for monetary policy. Cleveland Fed President Loretta Mester stated that the current level of interest rates is in a good position. She also mentioned, &#34;Depending on the data performance, we may need to be more accommodative or more restrictive.&#34; The &#34;number three&#34; at the Fed, New York Fed President John Williams, indicated that high uncertainty should prevent policymakers from providing strong guidance on the future path of interest rates. Fed Governor Christopher Waller noted that due to the energy shock caused by the Middle East conflict, if inflation risks outweigh labor market risks, the Fed may need to keep interest rates unchanged for an extended period.
However, Morgan Stanley strategist Michael Gapen believes that Waller may still leave room for rate cuts later this year, as the current easing of the Middle East conflict will only bring a temporary rise in inflation. He also stated, &#34;We believe Waller cannot be too dovish on the interest rate path issue, as this could raise concerns about the Fed's independence.&#34; &#34;Every new Fed chair faces some pressure to prove their anti-inflation credibility, and Waller is likely to be asked under what circumstances he believes policy rates need to be raised.&#34;
If the Transition of Fed Chair is Not Smooth, Trump's Wish for Rate Cuts May Be Difficult to Fulfill
It is worth mentioning that the &#34;handover&#34; process of the Fed chair is currently not going smoothly, which could become a variable affecting the Fed's monetary policy path.
The confirmation hearing for Waller, held by the U.S. Senate Banking Committee this week, will serve as a platform for bipartisan senators to scrutinize Waller's positions on economic and monetary policy. Investors are particularly focused on how Waller will balance the competing pressures—on one hand, the demand from Trump for significantly lower borrowing costs, and on the other hand, the economic conditions that are not yet sufficient to support rate cuts, at least in the short term.
Given the Trump administration's repeated attacks on the Fed and the fact that inflation has been above the central bank's target for more than five consecutive years, any missteps in answering questions about interest rates could undermine the credibility of the Fed under Waller's leadership.
However, even if Waller performs flawlessly at the committee hearing, as long as the Justice Department's investigation into Powell continues, there remains uncertainty on Waller's path to Senate confirmation. North Carolina Republican Thom Tillis has stated that he will not support any nominee until the criminal investigation is resolved, as he believes the investigation threatens the Fed's independence.
Last week, Trump reiterated that if Powell fails to leave the Fed on time, he will take action to dismiss him. Although Powell's term as Fed chair will expire on May 15, his term as a board member will continue until January 2028. Traditionally, an outgoing Fed chair fully resigns from the institution after their leadership term ends, but Powell stated in March that he would remain until the Justice Department's investigation is resolved &#34;in a transparent and final manner.&#34;
Trump indicated that he does not intend to abandon the Justice Department's investigation into Powell and reiterated the necessity of investigating issues related to the Fed building project. The recent raid by U.S. prosecutors on the construction area of the Fed headquarters also indicates that the Justice Department has not given up on the investigation into Powell, and earlier this month, U.S. District Judge Boasberg upheld the decision to quash the subpoena against Powell
If Waller fails to gain confirmation before May 15, Powell stated that he intends to serve as interim chair and may continue to hold another key position—chair of the Federal Open Market Committee (FOMC), which is responsible for setting interest rates. This means that the Trump administration's continued push for the investigation could not only delay Waller's confirmation but also allow Powell to retain significant control over monetary policy

As bond traders remain optimistic about the end of the Middle East conflict, Kevin Warsh will be the focus of attention at the Senate hearing. Market expectations for a Federal Reserve rate cut have risen, especially against the backdrop of falling oil prices. Analysts at JP Morgan pointed out that if Warsh supports a rate cut, it could further drive market bets on rate cuts; conversely, it could trigger a market reversal if he does not

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