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Two-year Treasury yields hit 17-month high as oil and Iran risks rise
The 2-year yield climbed to 4.3105%, and Fed funds futures now price a 32% chance of a July 29 hike and 76% odds by September.
U.S. interest rate sensitive two-year Treasury yields rose to a 17-month high on Wednesday, driven by higher oil prices that are reviving fears about renewed inflation and the possibility of additional Federal Reserve rate hikes.
According to Reuters, the resurgence of tensions involving Iran has pushed inflation concerns back into focus after a brief lull following a late June ceasefire deal. Oil prices neared a six-week high, as President Donald Trump vowed to destroy an Iranian bridge or power plant after Iran fires at ships in the Strait of Hormuz, raising market stakes after Yemen-based Houthis threatened a second energy route.
Reuters also tied the move in yields to shifting Fed expectations after June signals that policymakers expect to lift borrowing costs later this year. Fed Governor Christopher Waller said the central bank may need to raise rates “in the near term” if incoming data show inflation running well above the 2% target, which macro strategist Will Compernolle said set a hawkish policy anchor independent of energy pass-through.
In pricing, Fed funds futures show a 32% chance of a rate hike at the Fed’s July 29 conclusion and 76% odds of an increase by September, with 90% probability by year-end. The 2-year yield rose 3.68 basis points to 4.298%, reaching 4.3105%, while the 10-year yield rose 2.65 basis points to 4.655% and hit 4.6606%, and the 2 to 10-year curve flattened to 35 basis points.