10-Year Yield Drops Approaches 2-Month High

The yield on the 10-year US Treasury note rose to the 4.60% threshold on Thursday, approaching the near two-month high of 4.62% on July 13th, as markets positioned for a rate hike by the Federal Reserve this year. The wave of attacks between the US and Iran further lifted benchmark fuel prices, rekindling concerns of energy inflation from last quarter that triggered sharp increases in inflation since March. This coincided with fresh signals of a strong economy. Retail sales continued to grow at a solid pace in June, when net of lower fuel turnover due to the momentary drop in prices. On top of that, initial jobless claims fell to an over two-month low. The inflationary outlook and robust labor backdrop had driven the FOMC to project a rate hike this year, consistent with the current positioning in rate derivative markets.

The yield on the US 10-year Treasury note hovered around 4.56% on Thursday after falling for two straight sessions, as easing inflation pressures reduced expectations of a near-term Federal Reserve interest rate hike. Data released on Wednesday showed US producer prices unexpectedly fell in June for the first time in nearly a year, largely driven by lower energy costs, following Tuesday’s softer-than-expected consumer inflation report. Markets scaled back expectations for a Fed rate increase in September, with the implied probability dropping to around 44% from 50% a day earlier. Meanwhile, investors continued to monitor escalating attacks in the Middle East after the US launched additional strikes against Iranian targets. The renewed conflict pushed oil prices sharply higher this week, reviving concerns over inflation and the outlook for interest rates. Still, President Donald Trump said on Wednesday that Tehran had signaled a willingness to resume negotiations.

The yield on the US 10-year Treasury note edged down to 4.55% on Wednesday after a softer-than-expected producer price report provided fresh evidence of easing inflationary pressures. Producer prices unexpectedly fell 0.3% in June, compared with expectations for no change, while both the annual headline and core measures also came in below forecasts. The report followed Tuesday's softer-than-expected CPI data, reinforcing signs of moderating inflation. Also, NY Fed President Williams said that while inflation “is unquestionably too high, there are encouraging reasons to expect that inflation has peaked”. Meanwhile, Fed Chair Warsh reiterated the central bank's commitment to restoring price stability during his congressional testimony but stopped short of signaling a more hawkish policy stance. Markets are pricing in roughly a 49% probability of a Fed rate hike in September, below 70% last week.