U.S. Treasury yields rose to their highest level of the year as oil prices climbed due to threats of escalating war in Iran, boosting market expectations that the Federal Reserve could raise interest rates as early as next week.
The yield on two-year Treasury notes, which is particularly sensitive to expectations about Federal Reserve policy, rose as much as 7 basis points on Thursday to 4.37%, reaching its highest level since early 2025. The benchmark 10-year Treasury yield hit a year-to-date high of around 4.7%. Meanwhile, the 30-year Treasury yield reached 5.19%, slightly below its peak since 2007.
Brent crude prices surged above $100 a barrel after Iran-backed Houthi militants claimed responsibility for the first attack on a commercial vessel in several months. The rise has further strengthened market expectations that the Federal Reserve, led by Chair Kevin Warsh, will raise interest rates, with the anticipated 25-basis-point hike in September now fully priced in.
Swap contracts tied to the Federal Reserve’s policy meeting dates indicate a roughly 35% chance of a rate hike at the July 28–29 meeting, up from about 10% a week earlier.
Matthew Franklin-Lyons, head of global interest rate trading and global fixed income financing at JPMorgan, said: “The new chair has abandoned policy bias, shortened the statement, and advocated ‘think more, speak less.’ Well, now the market is ‘thinking.'”
Wash emphasized that the central bank must bring the annual inflation rate back to its long-term target of 2%. It has been five years since inflation was last this low, and even though June’s data showed some easing in consumer price pressures, Wash stated that the central bank is far from declaring the task complete.
Market demand for $21 billion in 10-year inflation-protected securities (TIPS) was weak, with the Thursday issuance priced at 2.438%, the highest level since 2008. Although real yields remain below those of conventional Treasuries, they have recently risen. This month, the 10-year TIPS yield has hit a new annual high nearly every day.
John Kanaan, chief analyst at Oxford Economics, said: “Due to pessimistic outlooks, potential auction participants are currently holding back. As tensions with Iran escalate and oil prices rise, yields are also climbing.”
John Briggs, head of U.S. interest rate strategy for Rabobank North America, said the uncertainty surrounding how the Federal Reserve will respond to inflation surging due to rising energy prices has “led markets to be reluctant to hold bonds amid higher oil prices.” The debate centers on whether the latest spike in oil prices will push officials who were previously “hesitant” to finally decide on raising interest rates.
Since the June meeting, several Federal Reserve officials have warned of risks that inflation could rise; if policy does not change next week, this outcome could lead to opposition among the voting members of the rate-setting committee.
