Treasury Yields Continue to Advance

The yield on the US 10-year Treasury note held around 4.26% on Friday, hovering near five-week highs as escalations in the Middle East conflict and rising oil prices fueled concerns about resurgent inflation, reinforcing bets that the Federal Reserve will keep interest rates higher for longer. The central bank is widely expected to hold the fed funds rate steady next week, though focus will turn to the updated dot plot and policymakers’ projections for the remainder of the year. Inflation risks also led markets to push back expectations for the next Fed rate cut from July to September. Investors now await January’s PCE price index, the Fed’s preferred inflation gauge, for fresh insights on price trends, though it will not capture the impact of the Iran war. Oil prices surged after Iran’s new supreme leader, Mojtaba Khamenei, pledged to keep the Strait of Hormuz effectively closed while Tehran intensified attacks on regional oil and transport facilities.

The yield on the US 10-year Treasury note edged up to 4.25% on Thursday, extending a rally over the previous two sessions that had lifted the benchmark yield by roughly 13 basis points, amid escalating conflict with Iran. The new supreme leader of Iran said the Strait of Hormuz should remain closed, adding that the war would continue “out of necessity” and that other fronts were being considered. Meanwhile, the surge in oil prices has continued, further fueling expectations of higher inflation. Yields are also being pressured by concerns over the fiscal outlook, particularly amid rising defense spending. The Federal Reserve is widely expected to keep the fed funds rate unchanged next week, though attention will focus on the updated dot plot and policymakers’ expectations for the remainder of the year. Markets are currently pricing in only one 25bps rate hike, likely in September.

The yield on the US 10-year Treasury note was largely unchanged at around 4.23% on Thursday, pausing a rally over the previous two sessions that had pushed the benchmark yield up by roughly 13 basis points. Traders continue to weigh developments in the war involving Iran, the lack of an immediate resolution, and further increases in energy prices. Rising oil costs continue to fuel expectations of higher inflation. Recent economic data showed initial jobless claims slightly below forecasts at 212K, consistent with figures from previous weeks, while the US trade deficit narrowed in January. Looking ahead, the Federal Reserve is widely expected to keep the fed funds rate unchanged next week, though attention will focus on the updated dot plot and policymakers’ expectations for the remainder of the year. Currently, markets are pricing in only one 25bps hike, likely in September.