US 10Y Yield Holds Advance Ahead of Fed Decision

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%.

The yield on the US 10-year Treasury note edged slightly lower to 4.65% on Wednesday, after reaching a 16-month high of 4.7% in the previous session, as investors continued to assess the inflationary impact of the energy shock triggered by the war with Iran. The Strait of Hormuz remains largely closed, keeping oil prices roughly 50% above pre-war levels and fueling concerns over sustained inflationary pressures. Higher energy costs are expected to continue to add upward pressure to consumer prices, likely forcing central banks to maintain tighter monetary policy or even resume interest rate hikes, while also complicating fiscal conditions. 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%. Investors are now awaiting the release of the latest FOMC minutes later in the day for further insight into policymakers’ outlook on inflation and interest rates.