US 10-Year Yield Rises to 8-Month High

The yield on the 10-year US Treasury note rose to above the 4.4% threshold on Tuesday, the highest in eight months, as pro-inflationary risks and higher deficit spending due to the war in the Middle East lifted the outlook for US rates. Reports indicated the US deployed more troops to the Middle East, against the view that the administration was aiming for de-escalation, while attacks between militaries in the region continued. Key oil and gas prices rose further, adding to concerns of a rebound in inflation shortly after the latest PPI reading had already flagged some traction for wholesale prices. Pro-inflationary risks drove the FOMC last week to project less room for rate cuts. On the fiscal side, the presidential administration pushed for a larger military funding to combine with an already fiscally expansionary spending bill. Consequently, the auction for the latest 2-year note tailed by 1.8bps and had primary dealers take 24.12% of what was auctioned, the most since 2022.

The yield on the US 10-year Treasury note rose to 4.37% on Tuesday, reversing part of the previous session’s 4 bps decline, as traders navigated the conflict with Iran and assessed prospects for de-escalation. Reports point to ongoing communication and diplomatic efforts to end the war, but fighting has persisted despite President Trump’s announcement of a five-day pause. Adding to concerns, the WSJ reported that Saudi Arabia and the UAE are moving closer to joining the conflict against Tehran. Iran has continued its attacks on US bases in the Gulf and maintains that no negotiations with the US are underway. Meanwhile, oil prices are still rising, keeping pressure on inflation, with traders no longer expecting the Fed to deliver any rate cuts this year. Last week, the central bank kept the federal funds rate unchanged but still indicated the possibility of a 25bps rate cut in 2026, followed by another in 2027.

The yield on the US 10-year Treasury note climbed back above 4.37% on Tuesday, reversing part of the previous session’s decline as Iran denied any talks to end the conflict, pushing back against President Donald Trump’s claims. Tehran also reported new attacks on US targets, while Israel continued strikes against Iran, keeping tensions elevated. On Monday, Treasury yields had retreated after Trump postponed planned strikes on Iranian energy infrastructure for five days, citing productive discussions with Iran over the past two days. The outcome of any talks and the potential reopening of the Strait of Hormuz remain highly uncertain, while Middle Eastern energy capacity may take time to return to prior levels. This raises the risk of higher inflation in the coming months and the possibility of interest rate hikes from major central banks. Investors now turn their focus to upcoming US manufacturing data for fresh cues on how businesses are faring under heightened geopolitical risks.