US Treasury yields continued their ascent on Wednesday, marking a third straight day of gains amid renewed geopolitical tensions.
The yield on the benchmark 10-year note rose by 3.45 basis points to 4.66%, reaching its highest level in two months.
The escalation in tensions has driven international oil prices higher, with crude gaining approximately 3% on Wednesday. The resulting increase in inflation expectations is prompting investors to reassess the outlook for Federal Reserve monetary policy in the coming months. Market expectations for a more hawkish Fed policy stance are growing, with the probability of a 25 basis point rate hike in July rising to 34.7%. The policy-sensitive 2-year Treasury yield climbed above 4.30%, hitting a new one-and-a-half-year high, with a gain of over 4 basis points on Wednesday.
Concerns over expanding debt levels and persistent inflation are fueling a sustained sell-off in ultra-long-term bonds. The yield on the 30-year Treasury rose by 2.20 basis points to 5.15%, remaining above the 5% threshold for multiple consecutive sessions.
Statistics show that the 30-year yield has traded above 5% on 27 trading days so far this year, accounting for roughly 19% of all sessions. This represents the highest frequency of such occurrences since 2007, a development some market observers liken to the re-emergence of 'bond vigilantes'.
In 2007, the 30-year yield was above this level for 50 trading days. However, the current Federal Reserve benchmark rate is 150 basis points lower than it was at that time. This suggests that market concerns over deteriorating fiscal conditions are now more pronounced than during the early stages of the subprime mortgage crisis, demanding a higher risk premium.
The spread between the 2-year and 10-year Treasury yields has now narrowed to 35 basis points, half the level of nearly 70 basis points seen in February. Economists from Capital Economics indicate they expect this spread to continue narrowing in the coming months, potentially leading to a yield curve inversion. The current rise in short-term yields is attributed to the market's upward revision of rate hike expectations. The core risk for a complete curve inversion stems from the escalation of geopolitical conflict in the Strait of Hormuz, which is pushing oil prices higher and exacerbating inflation.
On Wednesday, the US Central Command announced on social media that US forces had commenced a new round of strikes against Iranian military targets. This marks the twelfth consecutive night of US strikes against Iran.
Earlier that day, the US Central Command reiterated on social media that "Iran does not control the Strait of Hormuz," stating that since the resumption of the maritime blockade against Iran on July 14th, US forces have redirected nine commercial vessels and disabled another.
US leadership stated earlier on Wednesday that for every instance of Iranian forces firing on vessels in the Strait of Hormuz, the US would respond by bombing and destroying an Iranian bridge or power plant, including such facilities in and around Tehran. Iranian military officials responded that any US strikes on Iranian bridges or power plants would be met with retaliatory strikes against energy and other infrastructure in the region with US interests.
An assessment by US intelligence agencies suggests the new round of US military strikes is unlikely to significantly impact the Iranian government or force it to soften its stance in negotiations, predicting a prolonged standoff between the two nations.
In a media interview on Wednesday, the World Bank's Senior Vice President and Chief Economist stated that a renewed escalation of conflict between the US and Iran could push inflation and interest rates higher, potentially reducing global economic growth to 1.3% this year.
The economist noted that given the high uncertainty surrounding the Middle East conflict, the World Bank's June economic forecasts modeled three scenarios. The worst-case scenario of the conflict persisting for six months or longer is now close to becoming a reality. Under this scenario, global inflation could reach 4.5% this year.
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