Short-term US Treasury yields have risen to their highest levels since the beginning of 2025, with renewed tensions in Iran pushing oil prices higher, leading markets to speculate that the Federal Reserve may need to raise interest rates to combat inflation.
The yield on the interest rate-sensitive 2-year Treasury note briefly increased by 4 basis points to 4.25%, marking its highest point since February 2025. The 5-year yield also reached a similar high, touching 4.35%. The benchmark 10-year Treasury yield rose by 3 basis points to 4.60%, its highest level since May.
Brent crude oil surged by 5% following a new round of retaliatory strikes between the US and Iran. Conflicting statements from both sides regarding the status of the Strait of Hormuz have added to market uncertainty. Bond market losses extended after US President Donald Trump stated that America was "restoring" a blockade on Iranian vessels.
The rise in Treasury yields, ahead of the release of US consumer and producer price data this week and testimony from Federal Reserve Chair Kevin Warsh, reflects growing market expectations that the Fed may need to act sooner on rate hikes. This anticipated move aims to counter price pressures stemming from the rebound in global energy prices and signs of resilience in the US economy.
Swap data compiled shows traders are currently pricing in approximately a 40% probability of a Fed rate hike at its meeting later this month. Market pricing suggests a 100% probability of a hike by September.
"The 2-year sector continues to weaken as investors remain focused on the July 29 FOMC meeting as a potential launch point for Warsh's first hike," said Ian Lyngen, head of US rates strategy. "Tuesday's CPI data and Warsh's testimony will undoubtedly shape the market's assessment of that probability."
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