US 10-Year Yield Off Session Highs

The yield on the 10-year US Treasury note bounced back to 5.46% on Monday, the highest in over two weeks, reflecting expectations of high interest rates by the Fed despite the mid-session pullback in energy prices. Inflation data due on Wednesday is expected to cross the 4% threshold, consolidating the accelerating momentum in consumer prices. The backdrop combines with a strong labor market as jobs growth has held above recent averages despite the Federal Reserve signaling concerns of a stalled labor force, adding leeway for the central bank to maintain rates at a restrictive level to fight inflation. Rate futures pointed to expectations of a rate hike by the central bank this year. The latest developments held despite Israel and Iran pledging to hold fire following their escalation over the weekend, lowering energy prices and setting the stage for more talks between Tehran and the US.

The yield on the US 10-year Treasury was little changed at 4.53% on Monday, retreating from highs of 4.58% earlier in the session, as traders continued to assess the back-and-forth situation in the Middle East. Reports indicated that Iran’s military had ceased strikes against Israel but warned it would resume hostilities if Jerusalem continues operations in Lebanon. In addition, President Trump said that Iran and Israel were looking to agree on a ceasefire, and that negotiations with Iran on a final deal were progressing. As a result, oil prices trimmed some gains. However, concerns about persistent inflation stemming from a prolonged conflict with Iran continued to weigh on sentiment, with the odds of a Fed rate hike as soon as October currently standing near 52%. CPI and PPI data in the US are due this week and will provide further insight into evolving price pressures.

The yield on the US 10-year Treasury note climbed to around 4.57% on Monday, reaching its highest level in two weeks as stronger-than-expected US jobs data reinforced expectations that the Federal Reserve could raise interest rates later this year. Friday’s employment report showed the US economy added 172,000 jobs in May, significantly above forecasts of 85,000, while the unemployment rate remained unchanged at 4.3%. Following the data release, markets increased the likelihood of a Fed rate hike in December to nearly 70%, up from roughly 50% previously. Even so, the Fed is still widely expected to keep interest rates unchanged at the June 16-17 meeting under new Chairman Kevin Warsh. Expectations for tighter monetary policy were also supported by escalating tensions in the Middle East, which pushed oil prices higher and fueled concerns about renewed inflationary pressures.