Goldman sees Warsh remarks as new risk for two-year Treasuries

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Goldman expects volatility in two-year bonds

Highlights

Goldman expects more volatility in two-year Treasuries.
Warsh’s hawkish message brought rate-hike bets forward.
Markets see more than an 80% chance of a September hike.

Short-end rates reprice faster

Kay Haigh, global head and chief investment officer of fixed income and liquidity solutions at Goldman Sachs Asset Management, said Warsh’s post-meeting message was clearly hawkish and shifted attention back to inflation. That stance pushed traders to bring forward expectations for the next rate hike, Bloomberg reports.

Markets now assign more than an 80% probability to a September increase, according to Bloomberg data cited in the report. More than one move higher is priced in by October. Before the Fed meeting, traders had largely expected the first increase to come no earlier than December.

The move was most visible in two-year Treasuries, which are closely tied to expectations for Fed policy. The two-year yield jumped 13 basis points Wednesday, its largest rise since April 2025 and one of the biggest Fed-day moves since 2008. The yield continued to fluctuate Thursday as investors adjusted to the new policy tone.

The Fed held rates steady for a fourth straight meeting, but its projections showed a stronger tilt toward future hikes. Nine policymakers expected higher rates by year-end, while eight saw no change and only one projected a cut. Warsh declined to submit his own rate forecast, reinforcing the idea that the new chair wants markets to rely less on explicit Fed signaling.

Longer bonds may benefit from clearer inflation focus

Goldman’s argument is that a more forceful anti-inflation message could calm the long end of the curve. If investors believe the Fed is serious about returning inflation to its 2% target, longer-term inflation risk premiums may fall even as short-term rates become harder to predict.

The 30-year Treasury yield touched a two-month low Thursday, while the two-year sector remained unsettled. That contrast points to a flatter curve, with front-end yields more exposed to incoming data and policy repricing.

Warsh also announced task forces to review areas including Fed forecasting data and policy implementation. Those reviews may eventually change how the central bank communicates and operates, adding near-term uncertainty but potentially reducing longer-term volatility if investors gain confidence in the Fed’s framework.

A new test for bond investors

The shift matters because the two-year note is becoming the main pressure point for Fed uncertainty. Less forward guidance means each inflation, jobs and spending report may carry more market weight.

For investors, the result is a more tactical bond market. Short maturities may swing sharply as traders debate the timing of hikes, while long bonds could become more attractive if the Fed’s inflation stance looks credible. Goldman’s view suggests Warsh’s first meeting did not simply change rate expectations. It changed where Treasury volatility is likely to concentrate.

We have previously highlighted that Goldman Sachs and JPMorgan reassess the private credit market.

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