(Bloomberg) -- The $31 trillion Treasury market has an unequivocal message for Kevin Warsh’s Federal Reserve: Interest rates aren’t high enough.

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Yields on policy-sensitive US two-year notes have surged to their highest level in more than a year after a trove of economic data led traders to price in at least one quarter-point rate hike as soon as October. At around 4.15%, the two-year yield trades well above the Fed’s current policy band of 3.5% to 3.75%, a divergence that began in March.

The reset upwards only intensified last week after the latest read on job growth topped all forecasts, reinforcing a growing conviction that rates need to rise in order to rein in inflation pressures and temper the risk of an AI-induced boom overheating the economy. Reports due later this week on consumer and wholesale prices in May are expected to provide further validation of the narrative.

“Show me where rates are being restrictive,” said Jack McIntyre, portfolio manager at Brandywine Global Investment Management. “Treasury yields are going to be biased higher until something breaks.”

The rise in US yields has extended across the entire Treasury curve, creating a charged backdrop for Fed policymakers and their new chairman, Kevin Warsh, who helms his first meeting and press conference next week.

Having advocated the case for easing rates based on the view that policy was restrictive, Warsh now faces a bond market increasingly concerned the Fed may be getting behind the curve, and a number of central bankers who are also worried about inflation and don’t rule out rate hikes in the future.

Brandywine’s McIntyre said his firm remains underweight interest-rate exposure in the US and doesn’t see super-compelling value in bonds, given the economy’s resilience. Others see the economy at risk of going into over-drive.

“For the first time in a while, we are considering a scenario where the US economy actually starts overheating,” said Andrzej Skiba, head of BlueBay US fixed income at RBC Global Asset Management, citing a ramp up in artificial intelligence spending into an already-robust economy.

Skiba said the scenario isn’t his base case, adding he’s keeping his interest-rate exposure close to benchmarks as he waits to see whether Warsh comes out as dovish or hawkish.