Treasury Yields Approach June Highs Again

The yield on the 10-year US Treasury note was below 4.38% on Monday, the least since early May as lower energy prices dampened inflationary risks and the likelihood of a hawkish response by the Federal Reserve. Wholesale crude oil and fuel prices maintained the sharp decline from the end of June amid evidence that tanker flows through the Strait of Hormuz are being restored. The improving supply for key energy commodities countered the price pressures that drove a large portion of the FOMC to project one or more rate hikes this year following their meeting this month. Core inflation gauges had already reflected rising underlying inflation above the 3% level, while jobs data continued to suggest robust labor market conditions. Still, long-term yields did not drop at the extent that energy prices did. Fed Chairman Warsh repeatedly campaigned for the Fed to reduce its holdings of Treasury notes and bonds, and started a task force to investigate whether a move is warranted.

The yield on the US 10-year Treasury note held steady at around 4.38% on Monday after declining sharply last week, as investors awaited the latest US monthly jobs report for fresh signals on labor market conditions and the outlook for Federal Reserve policy. Fed Chair Kevin Warsh reiterated the central bank's commitment to bringing inflation under control, reinforcing the hawkish tone of his debut earlier this month that prompted markets to scale back expectations for US rate cuts this year. Markets now consider the possibility of multiple Fed rate hikes this year, with a majority pricing the first increase in September. Meanwhile, investors continued to monitor developments in the Middle East after oil prices climbed following renewed clashes between the US and Iran around the Strait of Hormuz, although both sides agreed to suspend further attacks ahead of peace talks set to resume this week in Doha, Qatar.

The yield on the US 10-year Treasury note was little changed at 4.39% on Friday and is down 7 basis points on the week, after a broadly in-line PCE inflation report prompted investors to slightly scale back expectations for Fed rate hikes this year. Headline PCE inflation rose to 4.1%, while the core rate climbed to 3.4%, the highest since 2023 and well above the Fed’s 2% target, though both readings matched forecasts. Meanwhile, markets continue to monitor developments in the Middle East. Oil prices extended recent declines, even as geopolitical tensions resurfaced following an attack on a cargo ship near the coast of Oman in the Strait of Hormuz. Fed rate expectations remain elevated, with markets pricing in three rate hikes this year, and the probability of the first move in September standing at around 62%.