US Treasury yields are experiencing a significant selloff, with the 10-year yield reaching a 19-month high of 4.75% and other maturities, including the 5-year and 30-year yields, also climbing. This broad market movement is largely attributed to surging crude oil prices, which jumped more than 2% for WTI and 3% for Brent, surpassing $90 a barrel due to escalating tensions between the US and Iran. The US Central Command's targeting of Iranian rocket launchers and Iran's retaliatory strikes on US air bases in Jordan, along with President Trump's statements, have intensified geopolitical supply risks and inflation expectations.
The increase in oil prices is exacerbating inflation concerns, which are further compounded by recent hawkish remarks from Federal Reserve Chair Warsh. Speaking at the Jackson Hole symposium, Warsh indicated that financial conditions are not yet restrictive and vowed to bring inflation back to target, bolstering expectations for a Fed rate hike. The probability of a 25 basis point rate hike at the next FOMC meeting on September 15-16 has surged to 64%, up from 36% before his comments, leading some financial institutions like Barclays and Societe Generale to revise their rate hike forecasts.
The combined effect of higher oil prices and a more aggressive Federal Reserve outlook is pressuring bond prices, causing yields to rise across the board. This environment typically pressures risk assets while supporting oil and other inflation hedges. Stock indices like the S&P 500, Dow Jones Industrial Average, and Nasdaq 100 are all experiencing declines. Conversely, energy producers and service providers are seeing gains, with companies like SLB Ltd, Halliburton, Devon Energy, and Diamondback Energy up more than 3-4%.
Despite the negative impact on broader markets, the second quarter earnings season has been a positive factor for stocks, with the S&P 500 tracking for nearly 32% earnings growth, significantly exceeding earlier projections of 23%. AI spending is a major contributor, expected to account for almost 60% of the S&P 500's earnings-per-share growth in Q2. Looking ahead, market participants are closely monitoring upcoming US employment and inflation data, as strong reports could further intensify expectations for a Fed rate hike and potentially push Treasury yields even higher.
