US Treasury yields climbed to their highest levels in roughly two months on Tuesday and Wednesday, driven by a surge in oil prices amidst escalating geopolitical tensions between the US and Iran. The 10-year Treasury yield, a key benchmark for mortgage rates, rose to 4.65% on Wednesday, with some reports indicating it hit 4.64% on Tuesday, its highest since late May. Similarly, the 30-year yield advanced to 5.14% on Wednesday, marking its longest stretch above 5% since 2007.
The increase in yields reflects mounting worries among investors that higher energy costs will reignite inflationary pressures, potentially prompting the Federal Reserve to raise interest rates. Brent crude, the global benchmark, hovered near $93 per barrel on Wednesday, while the US benchmark rose above $87 a barrel on Tuesday, making it the highest in over a month. This comes as the US and Iran have exchanged strikes for an eleventh consecutive day, with diplomatic efforts ongoing but fragile.
While recent softer-than-expected inflation reports had initially eased concerns about a Fed rate hike, the renewed threat of rising oil prices has shifted expectations. Money markets are now pricing in a 34% chance of a rate hike this month and a 78% chance of at least a quarter-point hike by September. Deutsche Bank noted that the probability of a July hike was up to 26% by Tuesday's close. The policy-sensitive 2-year yield rose to 4.28% on Tuesday, reflecting market expectations for rate increases, and is well above the Fed's target range.
