US 10-Year Treasury Yield Holds Near 4.45%, Still Higher for May

The yield on the US 10-year Treasury note hovered around 4.45% on Friday, remaining near three-week lows, though still up roughly 7 bps for the month, as investors continued to monitor developments in the Middle East. Signs have emerged that the US and Iran may be closer than ever to reaching an agreement, with recent reports indicating that both countries have reached a preliminary understanding to extend a ceasefire by 60 days and begin discussions over the future of Tehran’s nuclear program, although President Trump has yet to formally endorse the terms. Oil prices have declined, helping to ease inflationary pressures. Data released on Thursday showed that both headline and core PCE monthly inflation came in below expectations although annual readings remained well above the Fed’s target at 3.8% and 3.3%. Investors currently expect the Fed to keep the federal funds rate unchanged through year-end, though markets still assign roughly a 46% probability to a rate hike in December.

The yield on the 10-year US Treasury note eased to around 4.44% on Friday, touching its lowest level in more than two weeks as reports of a tentative peace agreement between the US and Iran helped ease concerns over inflation and interest rates. Washington and Tehran have reportedly agreed in principle to extend their ceasefire by 60 days and begin negotiations on Iran’s nuclear program, while potentially allowing unrestricted shipments through the Strait of Hormuz. However, the report noted that President Donald Trump has yet to approve the proposed terms. Meanwhile, the latest US PCE price index data came in softer than expected, helping reduce fears that the recent energy shock would significantly worsen the inflation outlook. Even so, markets continue to expect the Federal Reserve to keep interest rates unchanged well into next year.

The yield on the 10-year US Treasury note fell to 4.46%, extending the drop from the 16-month high of 4.7% touched on May 20th as reports of an interim deal between the US and Iran limited the inflationary outlook. The US and Iran reportedly agreed to a 60-day memorandum of understanding that extends the current ceasefire and gradually restores the flow of tankers and commercial vessels through the Strait of Hormuz. Energy prices pared their rebound, adding support for Treasuries after inflation gauges did not surprise to the upside. PCE inflation rose as expected, and first quarter GDP revision was revised downwards on softer investment growth. Still, consumer spending remained relatively robust and jobless claims maintained their low level. Hawkish remarks by FOMC members also prevented a further drop in yields. Fed Vice Chair Jefferson warned that inflation risks remain tilted to the upside, while Minneapolis Fed President Kashkari said consumer prices are still “much too high”.