US Treasury yields advanced across the board on Tuesday, with the benchmark 10-year Treasury note yield holding around 4.62%. This level marks a two-month high and comes amid heightened concerns over inflation driven by sharply rising oil prices. Escalating tensions in the Middle East, particularly President Donald Trump's decision to reinstate a blockade on Iranian vessels in the Strait of Hormuz, contributed to the surge in oil prices and subsequently, inflation worries. The two-year Treasury yield, which is particularly sensitive to Federal Reserve policy expectations, rose as much as seven basis points to 4.28%, reaching its highest point since February 2025. Similarly, the five-year rate also hit a peak of 4.37%.
Market participants are now pricing in a significantly higher probability of a Federal Reserve rate hike in September. Estimates suggest roughly a 51% chance of a rate increase, a substantial jump from the 23% likelihood that the central bank would leave rates unchanged. This shift in expectations is also influenced by recent hawkish commentary from Fed officials, including Governor Christopher Waller, who hinted at potential rate hikes if underlying inflation persists. Traders see a nearly 50% possibility of a quarter-point rate increase this month after new US strikes on Iran.
Investors are closely monitoring upcoming key US inflation data, including consumer and producer price indices, as well as testimony from Federal Reserve Chair Kevin Warsh before the US Congress later today. These events are expected to provide further signals regarding the Fed's monetary policy stance. The surge in short-term rates reflects a growing consensus that the Fed may need to act sooner to curb price pressures stemming from both global energy price rebounds and signs of a resilient US economy. If the upcoming core inflation data comes in strong, officials may need to consider tightening monetary policy in the near term.
