Escalating tensions between the United States and Iran have driven oil prices higher, intensifying market speculation that the Federal Reserve may tighten monetary policy to combat inflation. This has pushed the yield on the 2-year U.S. Treasury note to its highest level in over 16 months.
Data shows the yield on the interest-rate-sensitive 2-year Treasury rose by as much as 3 basis points to 4.24%, marking its highest point since February 2025. The benchmark 10-year Treasury yield increased by 2 basis points to 4.58%.
Renewed attacks between the U.S. and Iran, coupled with conflicting statements from both sides regarding the status of the Strait of Hormuz, propelled Brent crude futures higher. At the time of reporting, Brent crude futures were up over 4% to $79.29 per barrel, while WTI crude futures also gained over 4% to $74.50 per barrel.
The U.S. Central Command stated that on July 11th, U.S. forces completed their third strike against Iran that week, targeting approximately 140 Iranian military objectives including missile and drone launch sites, naval assets, ammunition storage facilities, communication networks, and coastal surveillance stations. Iran subsequently announced a series of strikes on U.S. targets across the Middle East.
This followed earlier U.S. military strikes on July 7th and 8th, which Washington said were in response to recent Iranian attacks on commercial vessels transiting the Strait of Hormuz. Iran retaliated with missile and drone attacks on U.S. facilities in Bahrain, Kuwait, Qatar, and Jordan.
Simultaneously, the two nations offered contradictory accounts of the Strait's operational status. Later on July 12th, Iran's Persian Gulf Strait Authority reiterated that the Strait of Hormuz was currently closed to traffic, stating that applications for passage would be reviewed and necessary permits issued according to plan once the situation calmed. U.S. military sources, however, maintained that "transit is continuing."
The rise in U.S. Treasury yields reflects growing market expectations that the Federal Reserve may initiate interest rate hikes sooner to counter inflationary pressures stemming from the rebound in global energy prices. The overnight index swap (OIS) market is now pricing in the next Fed rate hike for October, a shift from the previous week's expectation for December.
Damien McCarroll, Head of Fixed Income Research at Westpac Banking Corporation, noted in a client report, "The renewed escalation in the Middle East reminds markets that there remains high uncertainty over how, when, and what the new normal will be for the Strait of Hormuz." He added, "Far from sparking a 'safe-haven' bid for U.S. Treasuries, this will continue to exert upward pressure across the yield curve."
This week, traders will closely monitor key U.S. inflation data for June, including consumer and producer prices. As the final inflation reports before the Federal Reserve's policy meeting later this month, these figures will provide crucial clues for assessing the future interest rate outlook.
Economists anticipate that both the headline Consumer Price Index (CPI) and the core CPI, which excludes food and energy, will show a slight moderation in their annual growth rates for June compared to May. However, both measures are expected to remain significantly above the Federal Reserve's 2% inflation target.
Additionally, investors will focus on the first congressional testimony by the new Federal Reserve Chair, scheduled for Tuesday.
Comments