The two-year US Treasury yield climbed to 4.22%, its highest point since February 2025, driven by a global bond selloff. This rise largely reflects renewed expectations that the Federal Reserve will increase interest rates by October, a shift from previous projections of a December hike. The market sentiment has been guided by the potential for higher oil prices to keep inflation elevated, especially after the US attacked Iran in late February, causing a significant supply shock.
The increase in oil prices, specifically Brent crude, which jumped over 7% to nearly $80 a barrel after initially soaring from $70 to $120 in late March due to the Middle East conflict, has intensified inflation concerns. The renewed conflict, including US strikes in Iran and President Donald Trump casting doubt on the US-Iran ceasefire, has fueled these worries. Bond investors are wary that the disintegration of the truce will lead to higher energy prices and inflation, with fears that upcoming Federal Open Market Committee (FOMC) minutes could exacerbate the situation.
European bond markets also experienced a steeper decline than US Treasuries, with German 10-year bond yields rising seven basis points to 3.07% and French borrowing costs reaching their highest since 2009. Money markets are now assigning a 90% chance of another quarter-point hike by the European Central Bank by September, and traders fully expect a quarter-point hike by the Bank of England by November, with a 40% chance of a second hike by year-end.
The 10-year US Treasury yield also saw an increase, climbing as much as four basis points to 4.59%, the highest since late May. This occurred ahead of a $39 billion auction for a reopening of the 10-year note. Bryce Doty, a bond fund manager at Sit Investment Associates, commented that Fed Chairman Kevin Warsh, who favors less central bank communication, might keep the FOMC minutes minimal, but warned that if oil prices rise and the Fed commits to price stability, "yields are going higher."
