US 10-Year Yield Declines in Catch-Up Trade

The yield on the US 10-year Treasury note fell about 5 basis points to 4.5% on Tuesday as bond markets reopened following a holiday-extended weekend, with investors assessing the latest developments in the Middle East. President Donald Trump said talks with Tehran were progressing well, though he warned that further attacks could follow if negotiations collapsed. Meanwhile, the US military targeted missile launch sites and vessels suspected of attempting to deploy mines in southern Iran, with US Central Command saying the operations were intended to protect American troops in the region. Despite the ongoing tensions, oil prices have dropped sharply over the past week amid renewed optimism that the US and Iran could reach an agreement to end the conflict and reopen the Strait of Hormuz, easing concerns about inflation and interest rate hikes. Investors are now awaiting upcoming PCE inflation data for fresh clues on the Federal Reserve’s policy outlook.

The yield on the US 10-year Treasury note eased slightly to 4.56% on Friday, holding losses from the two prior sessions and reaching its lowest level in about a week, as inflation concerns temporarily subsided. Investor sentiment improved after renewed optimism that the US and Iran could reach an agreement and potentially reopen the Strait of Hormuz, helping oil prices retreat from recent highs. Nevertheless, the situation remains highly fragile and volatile. Despite this week’s pullback, oil prices are still roughly 50% above pre-conflict levels, continuing to fuel inflationary pressures and reinforcing a cautious stance among major central banks. Minutes from the latest FOMC meeting showed that most policymakers believe additional rate hikes could still be necessary if inflation remains persistently above the Fed’s 2% target. Markets have increasingly priced in the likelihood of a 25-basis-point rate hike by the end of the year. US bond markets will be closed on Monday for a holiday.

The yield on the US 10-year Treasury note steadied around 4.57% on Friday after sliding for two straight session, as conflicting signals on the progress of US-Iran peace negotiations kept markets cautious about inflationary risks and interest rate hike prospects. Tehran said the latest US proposal had partially narrowed differences between the two sides, though comments from Iran’s Supreme Leader regarding the country’s uranium stockpile, along with disagreements over tolls in the Strait of Hormuz, continued to cloud prospects for a breakthrough agreement. Meanwhile, minutes from the latest FOMC meeting showed that most policymakers believe additional rate hikes could still be appropriate if inflation remains persistently above the Federal Reserve’s 2% target. Even so, markets broadly continue to expect rates to remain unchanged through the rest of the year, although traders are currently pricing in roughly a 40% probability of a 25 basis-point increase in December.