US Treasury yields experienced a significant rise, with 10-year and 30-year rates reaching their highest levels in about two months. This surge was primarily driven by a substantial increase in oil prices, which reignited inflation fears and led to speculation that the Federal Reserve would be prompted to raise interest rates. Yields across maturities were up by roughly two to five basis points on Tuesday.
The 10-year Treasury note yield hit 4.64%, its highest since late May, while the 30-year Treasury bond yield reached 5.15%. The 2-year Treasury note yield, which is more sensitive to short-term Fed policy, rose to 4.304%. This movement coincided with the 10th consecutive day of exchanges between the US and Iran, further exacerbating market unease and boosting the dollar against most major currencies. Money markets are now pricing in a 34% chance of a Fed rate hike this month and a 78% chance of at least a 0.25% hike in September, according to CME’s FedWatch tool, with some analysts noting the probability of a July hike reached 26% by Tuesday's close, the highest since a recent downside surprise in US CPI data.
The escalating tensions in the Middle East and Brent crude oil prices surging past $91 per barrel were identified as the immediate catalysts for the Treasury market sell-off. The 10-year yield breached the critical 4.60% technical defense line. The real yield on 30-year Treasury Inflation-Protected Securities (TIPS) also climbed to 2.95%, marking its highest level since 2008. Analysts noted that thin summer trading volumes and technical breakdowns amplified the volatility, effectively erasing gains made last week after better-than-expected Consumer Price Index (CPI) data. This situation presents a dilemma for the Federal Reserve as it approaches its next meeting, with market views on future policy deeply divided.
