Short-maturity US Treasury yields have climbed to their highest levels since early 2025, with the two-year yield rising as much as four basis points to 4.25% and the five-year rate hitting 4.35%. The benchmark 10-year yield added three basis points to 4.60%, its highest since May. This surge in yields is attributed to renewed tensions between the US and Iran, which have caused oil prices to jump, fanning speculation that the Federal Reserve may need to raise interest rates to curb inflation. Brent crude, for instance, jumped 5% after reports of new strikes and President Trump reinstating a blockade of Iranian ships.
Traders are now pricing in a roughly 40% chance that the Fed will hike rates at its decision later this month, with a full interest-rate increase factored in by September. BMO Capital Markets' Head of US Rates Strategy, Ian Lyngen, noted that the "cheapening of the two-year sector has been a consistent theme as investors remain focused on the July 29 FOMC meeting as potentially the timing for Warsh’s first rate hike." He added that Tuesday's CPI data and Warsh's testimony would heavily influence this probability.
This week, financial markets will also closely watch US data on consumer and producer prices, which are the final inflation reports before the Fed's July 27-28 meeting. While both headline and core CPI for June are expected to have eased slightly, both are projected to remain well above the Fed's 2% target. Despite increasing market expectations for rate hikes, many investors believe that monetary tightening is unlikely this year, with State Street Investment Management's Elliot Hentov suggesting the Fed needs "more definitive data" which might come next year.
