Tom Lee: The market has almost priced in two Fed rate hikes this year; rising US Treasury yields are suppressing market sentiment

BlockBeats News, June 25, Tom Lee stated that the market is still digesting the remarks made by Kevin Warsh following the first press conference last week and is repricing the macro environment. Over the past week, oil prices have fallen, and the war premium is shrinking. Currently, oil prices are not too far from around $65 before the conflict, indicating that the market believes related war risks are decreasing. On the other hand, the 10-year U.S. Treasury yield continues to rise, currently around 4.5%, higher than the pre-war level of about 4.2%. The main headwind facing the market recently has shifted from oil prices to yields.

Tom Lee pointed out that the market is not only focused on the 10-year U.S. Treasury yield but also starting to price in the possibility that the Federal Reserve may need to raise interest rates. According to Federal Funds futures, the market is currently almost pricing in two rate hikes within the year. Bank of America further predicted today that the Federal Reserve will raise rates three times this year, in September, October, and December respectively.

Jeffrey Gundlach often emphasizes the need to pay attention to the 2-year U.S. Treasury yield, as it usually leads the Federal Reserve and suggests the direction of its policy. From 2023 to 2025, the relationship between the 2-year Treasury yield and the Federal Funds rate once indicated that Federal Reserve policy was excessively tight and needed to be eased. However, recently this relationship has reversed, meaning that the Federal Reserve needs two rate hikes to catch up with the 2-year Treasury yield. He believes that, at least for now, yields have become a market headwind.