A renewed selloff in global bonds has pushed the yield on the 2-year U.S. Treasury note higher, approaching its recent peak as rising oil prices stoke inflation fears once more.
The yield on the short-term security, which is closely tied to expectations for Federal Reserve policy, climbed as much as 4 basis points to 4.22%, just 1 basis point shy of its high from June 22, which was the highest level since February 2025. The 10-year yield also rose as much as 4 basis points to 4.59%, its highest point since late May.
This increase reflects a renewed market belief that the Fed will need to start raising interest rates to combat persistent consumer price increases.
Traders in U.S. interest-rate markets have once again brought forward their expectations for a Fed rate hike to October, from a previous forecast of December. Since the U.S. strike on Iran in late February triggered supply concerns, the prospect of higher oil prices keeping inflation elevated has been influencing monetary policy expectations.
Although benchmark crude prices remain well below their late-March peak, they have climbed again as conflict between the U.S. and Iran has flared up and President Donald Trump stated the temporary ceasefire he brokered with Iran is over. The U.S. dollar strengthened against most G10 currencies.
"Bond investors are cautious," said Bryce Doty, a bond portfolio manager at Sit Investment Associates. "The market is worried the breakdown of the ceasefire will lead to higher energy prices and inflation, and also concerned the FOMC minutes could add fuel to the fire."
The FOMC pivoted to support a rate increase this year at its most recent meeting in June, and the minutes from that meeting are scheduled for release at 2 p.m. Washington time. That policy shift had driven the 2-year Treasury yield to what was then a 2026 high in the following days, before it retreated as oil prices fell.
Fed Chair Kevin Warsh, who took office in May and advocates for less communication from the central bank, "will try to keep the minutes as brief as possible," Doty said. "If oil prices start moving higher and the minutes signal a hawkish 'whatever it takes' stance on price stability, yields will move higher."
European Bond Markets
European government bonds fell more sharply than U.S. Treasuries, narrowing a gap that had opened late Tuesday when U.S. yields jumped with oil while European markets were closed for the day.
The moves in Europe also signal growing expectations that central banks will need to tighten monetary policy to counter inflation fueled by oil prices.
Money markets in Europe are pricing in roughly a 90% probability that the European Central Bank will implement a 25-basis-point rate hike by September, following its increase in June. For the UK, traders see a 100% chance of a 25-basis-point hike from the Bank of England by November, with a 40% probability priced in for a second hike before the end of the year.
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