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Oil eases yields, but Iran conflict keeps Fed hike bets alive
CME FedWatch shows 36% odds of a hike after next week’s two-day Fed meeting, up from 13% a week earlier.
Benchmark 10-year U.S. Treasury yields fell from 18-month highs on Friday as oil prices eased, but investors stayed cautious ahead of the Federal Reserve’s policy meeting next week, with many expecting a potentially hawkish surprise, according to LiveMint Markets.
The rebound in rate-hike expectations was tied to renewed concerns that escalation of the Iran war could prolong inflation and keep central-bank pressure on rates. Robert Tipp, chief investment strategist and head of global bonds at PGIM Fixed Income, said the Middle East situation has pushed markets to recognize a structural inflation level that would require higher rates.
Fed funds futures traders are pricing in a 36% chance of a hike by the conclusion of the Fed’s two-day meeting on Wednesday, up sharply from 13% a week earlier, the report said, citing CME Group’s FedWatch Tool. In yield moves, the 2-year note fell 2.9 basis points to 4.331% and the 10-year yield dropped 2.0 basis points to 4.683%, while the 2- to 10-year curve steepened to 34.8 basis points.
The report also pointed to tariff impacts and the inflation backdrop, noting that June consumer price data showed moderation beyond economists’ expectations, but that one release is unlikely to derail hikes if inflation remains above the Fed’s target and the economy stays strong. It added that U.S. tariffs of 10% and 12.5% on goods from 60 trading partners were imposed as a temporary 10% global tariff expired, and futures pricing points to the benchmark rate rising to about 4.20% by April.