US 10-Year Yield Rises on Middle East Risks

The yield on the US 10-year Treasury note rose to 4.60% on Monday, after declining about 7bps the previous week, as investors continued to assess developments in the Middle East and their implications for the economic and monetary policy outlook. Tensions between the US and Iran escalated over the weekend, sending oil prices to six-week highs before they pared most of their gains following comments from Iran's foreign ministry indicating that negotiations with the US could continue if the country's national interests are respected. Last week, both CPI and PPI reports came in softer than expected, but the recent surge in oil prices has raised concerns that the disinflation trend could stall. Markets continue to price in one Fed rate hike this year, with the probability of a September move remaining above 60%. Meanwhile, Fed officials have entered the blackout period ahead of next week's FOMC meeting, where policymakers are widely expected to leave the federal funds rate unchanged.

The yield on the 10-year US Treasury note climbed to around 4.57% on Monday, recovering from last week's losses as escalating tensions in the Middle East drove oil prices higher and fueled concerns over inflation and potential interest rate hikes. The US military carried out fresh airstrikes against Iran after three American service members were killed, while Tehran declared that its ceasefire with the US had effectively collapsed and said it intercepted four vessels transiting the Strait of Hormuz over the weekend. Meanwhile, Cleveland Fed President Beth Hammack on Friday joined a growing chorus of Fed officials warning about persistent inflation. Markets are now pricing in around a 53% chance of a Fed rate hike in September, up from 47% a day earlier, though the central bank is still widely expected to keep interest rates unchanged at this month's meeting.

The yield on the 10-year US Treasury note fell to 4.52% from the near two-month high of 5.62% on July 13th, amid softer inflation data and a decline in risk sentiment. Both consumer and producer inflation decline in June, while inflation expectations measured by the Michigan survey dropped for a second month, suggesting that the pullback in wholesale fuel costs are being transmitted to the economy. Fixed-income assets were also supported by new geopolitical uncertainty after US President Trump claimed China compromised US presidential elections in 2020, risking the truce between both countries since the exchange of tariff hikes last year. Still, pro-inflationary risks lingered as commercial vessels refrained from crossing the Strait of Hormuz due to new strikes between Iran and the US. Rate futures suggested that over two thirds of the market are positioned for a Fed hike by the end of the year, although this month's decision is expected to be a hold.