Treasury Yields Edge Down After Spike

The yield on the US 10-year Treasury note edged down to 4.56% on Thursday, after climbing about 10bps over the previous two sessions to its highest level in roughly two months. Escalating tensions in the Middle East fueled a sharp rise in oil prices, as the US and Iran exchanged strikes. The developments also stoked concerns about another bout of inflation, reinforcing expectations that the Fed could keep interest rates higher for longer. On the data front, the latest jobless claims report continued to point to a resilient labor market. Meanwhile, minutes from the FOMC's June meeting showed that only a few policymakers favored a rate hike, although officials expressed growing concern about inflationary pressures. Markets continue to price in at least one Fed rate hike by the end of 2026, while the probability of a move at the September meeting currently stands at around 64%.

The yield on the 10-year US Treasury note hovered around 4.58% on Thursday, remaining near a seven-week high as renewed conflict in the Middle East pushed oil prices higher, fueling inflation concerns and strengthening expectations for further interest rate hikes. The US military confirmed it had carried out strikes on Iran for a second straight day in an effort to curb Tehran’s ability to threaten navigation through the Strait of Hormuz, while Iran threatened a large-scale retaliatory operation against US military bases across the region. Meanwhile, minutes from the Federal Reserve’s June meeting showed that only a few policymakers favored a rate increase, though officials expressed growing concern over inflation. Markets continue to price in at least one Fed rate hike by the end of 2026. Investors are now awaiting the latest weekly jobless claims and existing home sales data for fresh guidance on the interest rate outlook.

The yield on the 10-year US Treasury note rose up to the 4.60% mark on Wednesday, the highest since May, as higher energy prices magnified the impact of a hawkish Federal Reserve. Fuel prices soared after a new wave of attacks between the US and Iran reignited concerns that energy from the Middle East will be blockaded. The pro-inflationary risks were consistent with minutes from the FOMC's June meeting, which indicated that a few policymaker saw higher core inflation readings and a robust labor market making the case for a rate hike. Rate futures continued to show a loose consensus that the Fed is due to deliver one rate hike this year, although nearly half of the market was positioned for more than one hike. Bonds were also under pressure from Fed Chairman Warsh's earlier calls for a smaller balance sheet, to be achieved by trimming the central bank's holdings of longer-term notes and bonds.