Treasury yields are flashing a warning signal the Fed can no longer ignore.

The $31 trillion U.S. Treasury market is sending Kevin Warsh a blunt message on the eve of his first Fed meeting: monetary policy isn’t tight enough. Yields are climbing, traders are pricing in hikes, and the new Fed chair walks into a bond market that has already made up its mind.

What’s Happening

Two-year Treasury yields have hit their highest level in over a year, sitting around 4.15%, well above the Fed’s current policy band of 3.5%–3.75%. That gap has been widening since March. Last week’s stronger-than-expected jobs report poured fuel on the fire, with traders now pricing in at least one quarter-point rate hike as early as October. Upcoming CPI and wholesale price data for May could push that expectation even further.

Market Reaction

The yield surge has spread across the entire Treasury curve. The 10-year is hovering around 4.5%, lifting mortgage and corporate borrowing costs. Bloomberg Economics estimates the recent yield move is roughly equivalent to 75 basis points of Fed tightening.

Why Traders Should Care

Warsh previously backed rate cuts, arguing policy was already restrictive. The bond market disagrees. The core question now: where does Warsh actually see the neutral rate? Markets put the inflation-adjusted neutral rate near 1.8%, nearly double the Fed’s own estimate of 1.1%. If the Fed needs to revise that assumption higher, the entire yield curve reprices.

What to Watch

Wednesday’s CPI print is the next flashpoint. A soft reading could bring a brief relief rally. A hot one accelerates the case for hikes.

As one portfolio manager put it: “Show me where rates are being restrictive.” The market is still waiting for an answer.

Stay ahead of every market-moving headline with QuoMarkets.