US 10Y Yield Climbs on Renewed US-Iran Tensions

The yield on the 10-year US Treasury note rose above 4.5% on Thursday, snapping a five-session decline as reports of fresh US strikes on an Iranian military facility dampened hopes for a near-term peace agreement and kept inflation and interest rate concerns elevated. Washington and Tehran also remained divided over major issues, including Iran’s insistence on retaining control of the Strait of Hormuz and preserving its nuclear program. Meanwhile, Minneapolis Fed President Neel Kashkari said on Thursday that reducing inflation remains his top priority, emphasizing that consumer prices are still too high even as the US labor market remains relatively strong. Investors are now awaiting the latest PCE price index report, the Federal Reserve’s preferred inflation gauge, for additional clues on the direction of monetary policy. Markets are currently pricing in roughly a 50% probability of a Fed rate hike by December.

The yield on the 10-year US Treasury note fell to 4.47%, retreating sharply from the 16-month high of 4.7% touched on May 20th as a drop in energy prices limited the outlook of higher inflation. Iran confirmed it has an unofficial draft of a peace deal document that would restore flows of tankers and commercial vessels through the Persian gulf within the month. However, the White House later denied the report. This was after the US administration signaled that they were closer to agreeing on a deal to end the war with Iran in previous days. The resulting drop in energy prices and inflationary risks limited the likelihood that the Fed will raise interest rates this year. The core PCE price index, which is the Fed's preferred gauge of underlying inflation, is expected to rise to an over two-year high of 3.3% in April. In turn, strength in leading labor market indicators extended the backdrop of a strong labor market, with ADP weekly values remaining above their recent average.

The yield on the US 10-year Treasury note declined to around 4.48% on Wednesday, reaching its lowest level in nearly two weeks as investors further reduced expectations for near-term Federal Reserve interest rate hikes amid signs of progress toward a US-Iran peace agreement. President Donald Trump said negotiations to extend a ceasefire and reopen the Strait of Hormuz are ongoing, while US Secretary of State Marco Rubio cautioned that any final deal could still require several more days to finalize. However, renewed hostilities in the Middle East continued to cloud the outlook, with the US military saying it carried out self-defense strikes in southern Iran, while Iran’s Revolutionary Guard claimed it targeted an F-35 fighter jet and multiple drones after they allegedly entered Iranian airspace. Investors are now awaiting upcoming PCE inflation data for additional insight into the Federal Reserve’s future policy trajectory.