Treasury Yields Edge Down

The yield on the US 10-year Treasury note fell to 4.68% on Tuesday, after rising above 4.71% the previous day, as oil prices steadied amid signs that diplomatic efforts are underway to reach a deal between the US and Iran and reopen the Strait of Hormuz. Pakistan signaled the possibility of an agreement that could help ease tensions roiling energy markets, although the situation remains highly fragile and uncertain. Meanwhile, the highly anticipated US CPI report is due on Wednesday and should provide further insight into the path of inflation. The report is expected to continue pointing to a slowdown in energy-related price pressures that intensified in the months immediately following the start of the US war with Iran. Markets are pricing in roughly even odds of a Fed rate hike next month, with about a 50% probability of rates being left unchanged.

The yield on the US 10-year Treasury note rose above 4.7% on Tuesday, moving closer to its highest level since January as surging oil prices strengthened expectations that the Federal Reserve could raise interest rates. The move came amid continued uncertainty over efforts by the US and Iran to reach an agreement to end the war and reopen the Strait of Hormuz. After Tehran called for financial compensation over damages suffered during the conflict, Trump said he had directed US representatives to insist on compensation from Iran in any future negotiations, further complicating diplomatic efforts. Meanwhile, investors awaited key US inflation data due this week for additional guidance on the monetary policy outlook. Markets are now pricing in around a 51% probability of a 25 basis point Fed rate hike in September, up from 44% a day earlier. Cleveland Fed President Beth Hammack said multiple rate increases could be necessary to bring inflation back to the central bank’s 2% target.

The yield on the US 10-year Treasury note rose to 4.7% on Monday, its highest level so far this month, as rising oil prices added to concerns about inflation. The increase in crude prices came amid growing uncertainty over a deal between the US and Iran to end the war and reopen the Strait of Hormuz, with an agreement appearing increasingly unlikely in the near term. Higher oil prices have raised concerns that renewed inflationary pressures could force the Fed to keep interest rates higher for longer, despite recent signs of a slowdown in the labor market following Friday’s weaker-than-expected jobs report. Meanwhile, traders are awaiting this week’s US CPI and PPI reports for further clues on inflationary pressures. The odds of a Fed rate hike in September currently stand at around 46%, down from approximately 64% a week ago, while the probability of rates remaining unchanged is seen at about 54%.