Treasury Yields in the US Move Higher

The yield on the US 10-year Treasury note rose to 4.5% on Monday, its highest level in about two weeks, while the more policy-sensitive 2-year Treasury yield climbed above 4.2%, reaching its highest level since February 2025. Investors returned from the long weekend focused on the outlook for monetary policy and inflation, despite signs of progress in US-Iran negotiations that contributed to another decline in oil prices. Markets are currently pricing in at least one 25bps Federal Reserve rate hike by year-end, with the probability of such a move as early as September standing at around 50%. Attention now turns to Thursday's PCE report, which includes the Fed's preferred inflation gauge and is expected to provide fresh insight into underlying price pressures and the likely path of interest rates.

The yield on the US 10-year Treasury note climbed to around 4.48% on Monday as investors assessed evolving developments in US-Iran peace negotiations while awaiting a key US inflation report. Reports suggested that Washington and Tehran had agreed on a roadmap toward a final agreement within 60 days, helping ease market concerns after both sides recently exchanged fresh threats related to the conflict in Lebanon. Attention now turns to this week's US PCE price index release, the Federal Reserve’s preferred measure of inflation. Last week, the Fed left interest rates unchanged but adopted a more hawkish tone. Nine of the 19 Fed policymakers now project at least one rate increase before year-end, with markets increasingly pricing in a potential hike as early as September. Higher rate expectations continued to provide support for Treasury yields.

The yield on the US 10-year Treasury note fell to 4.44% on Thursday, partially reversing the nearly 5bps increase recorded in the previous session, as investors digested the latest FOMC decision and assessed what new Fed Chair Kevin Warsh's leadership could mean for monetary policy and inflation. The Fed left the federal funds rate unchanged, as widely expected, but signalled that further tightening may be needed this year to contain inflationary pressures. Around half of policymakers now expect at least one rate hike in 2026, while the Fed sharply raised its forecasts for both headline and core PCE inflation this year. Warsh also sought to reinforce his inflation-fighting credentials, reaffirming the central bank's commitment to restoring price stability. Markets are now fully pricing in a rate hike by October. Meanwhile, the yield on the policy-sensitive 2-year Treasury note edged up to 4.20%. US bond markets will be closed on Friday for a holiday.