US 10-Year Yield Edges Lower

The yield on the 10-year US Treasury note fell to below 4.55% from the two-month high of 4.62% on July 13th, as softer inflation data pushed back expectations of a Federal Reserve rate hike. Both consumer and producer prices were below expectations in June, suggesting that the pullback in wholesale fuel costs were transmitted to the economy at a greater magnitude than forecast. Fixed-income assets were also supported by new geopolitical uncertainty after US President Trump claimed China compromised US presidential elections in 2020, risking the truce between both countries since the exchange of tariff hikes last year. Still, pro-inflationary risks lingered as strikes between the US and Iran were extended and commercial vessels refrained from crossing the Strait of Hormuz at the elevated traffic volumes from June. Rate futures suggested that over two thirds of the market are positioned for a Fed hike by the end of the year, although this month's decision is expected to be a hold.

The yield on the 10-year US Treasury note steadied around 4.56% on Friday and was on track to finish the week little changed, as investors balanced softer US inflation data against the escalating conflict between the US and Iran and its potential impact on the interest rate outlook. The US launched multiple strikes against Iran this week, while Tehran responded by targeting US bases in neighboring countries, driving oil prices higher and intensifying inflation concerns. Meanwhile, data released earlier this week showed US consumer inflation rose less than expected in June, while producer prices unexpectedly declined. Markets have now largely priced out the possibility of a Fed rate hike this month, though expectations remain divided over whether policymakers will raise rates in September.

The yield on the 10-year US Treasury note rose to the 4.60% threshold on Thursday, approaching the near two-month high of 4.62% on July 13th, as markets positioned for a rate hike by the Federal Reserve this year. The wave of attacks between the US and Iran further lifted benchmark fuel prices, rekindling concerns of energy inflation from last quarter that triggered sharp increases in inflation since March. This coincided with fresh signals of a strong economy. Retail sales continued to grow at a solid pace in June, when net of lower fuel turnover due to the momentary drop in prices. On top of that, initial jobless claims fell to an over two-month low. The inflationary outlook and robust labor backdrop had driven the FOMC to project a rate hike this year, consistent with the current positioning in rate derivative markets.