Goldman Sachs Asset Management's Global Head of Fixed Income and Liquidity Solutions and Chief Investment Officer, Kai Haig, has indicated that following Kevin Wash's first policy meeting as Federal Reserve Chair, his remarks are likely to amplify volatility in the short end of the U.S. Treasury market, while simultaneously helping to stabilize price fluctuations at the long end.
Haig stated that Wash delivered an "unambiguously hawkish signal" that took the market by surprise—he clearly prioritized combating inflation in the near term. Traders subsequently increased bets, anticipating policymakers would initiate rate hikes sooner than previously projected.
According to compiled data, investors now see an over 80% probability of a rate hike at the Federal Open Market Committee's (FOMC) September meeting and have fully priced in expectations for at least one hike by October. Prior to this Tuesday, traders had even considered a rate hike before December highly unlikely.
Haig said in an interview on Thursday: "We are going to see much higher volatility in the two-year Treasury market going forward. This stems from the market's focus on inflation expectations, as well as the stabilizing long end and the flattening yield curve. Furthermore, the Fed's various communications around forward guidance suggest that future guidance will be less explicit and policy will become more data-dependent. These factors could all translate into high volatility for the two-year yield."
The two-year Treasury yield, a key gauge of market expectations for Fed policy, surged significantly following the FOMC decision and continued to fluctuate on Thursday. The yield jumped by 13 basis points at one point on Wednesday, marking its largest single-day gain since April 2025 and matching the biggest increase on a Fed decision day since 2008.
Meanwhile, the 30-year Treasury yield touched a two-month low on Thursday.
Prior to Wednesday's meeting, Wall Street widely believed that, due to inflationary pressures heightened by the conflict in Iran, the Fed had completed its rate-cutting cycle. However, investors were also concerned about whether Wash might make concessions to Trump—after all, Trump appointed Wash following repeated public criticisms of former Chair Powell for not cutting rates aggressively enough.
Haig believes that Wash's clear commitment to bringing inflation back to the 2% target, combined with the potential impact of his new communication style, is likely to be further reinforced.
The Federal Reserve has established five specialized working groups to conduct a comprehensive review covering areas from economic forecasting data to policy implementation methods. These initiatives may bolster policy credibility.
Haig noted that the combination of these factors is expected to help reduce price volatility in long-term yields.
"These working groups are clearly designed to re-examine the entire operational framework of the Fed," Haig said. "The subsequent effects remain to be seen, but they are highly likely to translate into reduced volatility at the long end, which, in our view, would make long-end assets more attractive to investors."
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