US 10-Year Yield Extends Fall on Dovish Fed View

The yield on the US 10-year Treasury note fell about 6 basis points to 4.5% on Tuesday, as investors returned from the long weekend and remained cautiously optimistic that the US and Iran could still reach a near-term agreement, despite recent military strikes and ongoing mixed signals from both sides. Attention is also focused on the Fed’s policy outlook, with markets reassessing expectations for interest rates after the surge in oil prices fuelled inflation concerns. Traders are now pricing in an 80% probability of a rate hike by December, a significant reversal from earlier expectations of two 25bps cuts prior to the US and Iran. The upcoming PCE inflation report, the Fed’s preferred gauge of price pressures, will provide further clarity on the inflation trajectory and the central bank’s likely policy response.

The yield on the US 10-year Treasury note fell about 5 basis points to 4.5% on Tuesday as bond markets reopened following a holiday-extended weekend, with investors assessing the latest developments in the Middle East. President Donald Trump said talks with Tehran were progressing well, though he warned that further attacks could follow if negotiations collapsed. Meanwhile, the US military targeted missile launch sites and vessels suspected of attempting to deploy mines in southern Iran, with US Central Command saying the operations were intended to protect American troops in the region. Despite the ongoing tensions, oil prices have dropped sharply over the past week amid renewed optimism that the US and Iran could reach an agreement to end the conflict and reopen the Strait of Hormuz, easing concerns about inflation and interest rate hikes. Investors are now awaiting upcoming PCE inflation data for fresh clues on the Federal Reserve’s policy outlook.

The yield on the US 10-year Treasury note eased slightly to 4.56% on Friday, holding losses from the two prior sessions and reaching its lowest level in about a week, as inflation concerns temporarily subsided. Investor sentiment improved after renewed optimism that the US and Iran could reach an agreement and potentially reopen the Strait of Hormuz, helping oil prices retreat from recent highs. Nevertheless, the situation remains highly fragile and volatile. Despite this week’s pullback, oil prices are still roughly 50% above pre-conflict levels, continuing to fuel inflationary pressures and reinforcing a cautious stance among major central banks. Minutes from the latest FOMC meeting showed that most policymakers believe additional rate hikes could still be necessary if inflation remains persistently above the Fed’s 2% target. Markets have increasingly priced in the likelihood of a 25-basis-point rate hike by the end of the year. US bond markets will be closed on Monday for a holiday.