US 10Y Yield Holds Advance on Inflation Worries

The yield on the 10-year US Treasury note held around 4.04% on Tuesday after climbing 10 basis points in the previous session, as the escalating Middle East conflict pushed energy prices higher and fueled inflation concerns. The US military is expected to intensify attacks on Iran, with President Donald Trump giving no indication that operations would end soon. Markets have pushed back expectations for the next Federal Reserve rate cut to September from earlier forecasts of July, though two 25 basis point reductions remain priced in for 2026. Meanwhile, data on Monday showed US manufacturing activity expanded for the second consecutive month in February. However, the ISM survey reported that factory input prices rose to the highest level in nearly three and a half years, further intensifying inflation worries.

The yield on the 10-year US Treasury note soared over 10bps to 4.05% on Monday, erasing the bond rally from last week as higher inflation risks supported an outlook of restrictive interest rates from the Federal Reserve, offsetting the impact of low risk appetite. The US attacked Iranian targets and killed their supreme leader, prompting Iran to strike a series of civilian targets and energy infrastructure over the weekend while driving shipping companies to suspend trade through the Persian Gulf. The events triggered a surge in energy commodities, raising concerns that inflation could rise and force the Fed to keep rates elevated for a longer time. The concerns were magnified after the ISM prices gauge for manufacturers unexpectedly surged to a three-year high, while strong orders limited the argument for doves in the FOMC. Markets continue to expect a rate cut in the Fed's July meeting, although rate traders increased their positions for a September cut in the session.

The yield on the US 10-year Treasury note rose 9 basis points to 4.04% on Monday, partially reversing last week’s bond rally that had briefly pushed yields below the 4% mark. The move came as escalating conflict involving Iran triggered a surge in energy prices, reigniting concerns about renewed inflationary pressures that could limit the Federal Reserve’s scope to cut interest rates further this year. A series of attacks by the US and Israel on Iran prompted retaliatory strikes by Tehran against targets in the region, heightening geopolitical uncertainty and driving oil and natural gas prices significantly higher. Those inflation concerns ultimately outweighed an initial decline in yields driven by safe-haven demand, leading Treasury yields to edge higher. Markets now anticipate the first cut in the federal funds rate to come no earlier than July, while the probability of an additional reduction in October stands at only around 35%.