Treasury Yields Climb on Inflation Concerns

The yield on the US 10-year Treasury note rose to 4.62% on Thursday, reversing the previous session’s decline, as markets continued to track developments in the Middle East. Mixed signals have fuelled doubts that a US–Iran deal can be reached soon or that traffic through the Strait of Hormuz will be fully restored, pushing oil prices higher again and reigniting inflation concerns. Reuters reported that Iran’s Supreme Leader has issued a directive stating that the country’s near-weapons-grade uranium should not be sent abroad, hardening Tehran’s position on a key US demand in peace talks. Meanwhile, minutes from the latest FOMC meeting showed that a majority of policymakers believe additional rate hikes may be warranted if inflation remains persistently above the Federal Reserve’s 2% target. Markets still broadly expect rates to remain unchanged for the rest of the year, although traders are currently pricing in roughly a 40% chance of a 25bps hike in December.

The yield on the 10-year US Treasury note remained below 4.6% on Thursday after falling sharply in the previous session, as hopes for an imminent peace agreement between the US and Iran allayed inflation and rate hike fears. President Donald Trump said the US was in the final stages of negotiations with Iran, fueling hopes that the strategically important Strait of Hormuz could soon reopen. The prospect of renewed shipping flows triggered a steep decline in oil prices, helping to moderate inflationary pressures and lowering expectations that central banks will need to tighten monetary policy further. Still, minutes from the Federal Reserve’s latest policy meeting showed that most policymakers believe another rate increase this year could remain appropriate if inflation stays above the Fed’s 2% target. Markets continue to broadly expect the Fed to keep rates unchanged through the rest of the year, although traders currently see roughly a 50% chance of a rate hike in December.

The yield on the 10-year US Treasury note fell to 4.60% on Wednesday from the 16-month high of 4.7% in the previous session after Washington signaled it is close to signing an agreement with Iran to end their conflict, taming pro-inflationary risks. President Trump stated the US was on the final stages of talks with Tehran and three supertankers crossed the Strait of Hormuz with full cargoes, driving oil and fuel prices to retreat. The surge in energy inflation this year had already shown signs of spreading to core areas of the economy, resulting in hawkish dissents in the last Fed rate decision. Minutes from said decision added that a majority of FOMC members noted that it may be appropriate to raise rates to tame inflation this year if underlying inflation gauges remain above 2%. The Fed is still expected to keep the federal funds rate unchanged for the remainder of the year, although market-implied odds of a rate hike in December currently stand at around 50%.