U.S. Treasury yields climb as Fed hike expectations strengthen

Yields edge higher across curve

By 6:02 a.m. E.T. on Tuesday, the benchmark 10-year Treasury yield was more than 1 basis point higher at 4.622%. The 2-year Treasury note yield, which is closely tied to expectations for short-term Federal Reserve policy, also rose by more than 1 basis point to 4.277%. The 30-year bond yield increased nearly 1 basis point to 5.105%.

These moves followed a broader rise in yields across the curve on Monday. The 10-year yield climbed 4 basis points, while the 2-year surged more than 6 basis points during the prior session.

Oil surge and rate expectations

Monday’s yield gains came after President Donald Trump announced plans to blockade Iranian ports and apply fees of 20% on cargo passing through the Strait of Hormuz. The announcement pushed oil prices higher, with West Texas Intermediate futures last 3.2% higher at $80.66 a barrel and Brent crude up 4.3% at $86.90.

With oil prices rising, investor expectations for further monetary tightening have strengthened. According to the CME's FedWatch tool, markets are now pricing in two Federal Reserve rate hikes by April next year. The probability of a rate increase at the July 29 meeting has risen to 39%, up from 26.7% a week earlier.

Focus on Warsh testimony and inflation data

Traders are awaiting Fed Chairman Kevin Warsh’s first appearance before Congress this week, which will offer additional insight into the central bank’s assessment of the U.S. economy. Warsh is scheduled to testify before the House Financial Services Committee later Tuesday and the Senate Banking Committee on Wednesday.

Investors are also watching the latest June inflation data, due later Tuesday. Annual inflation, which reached 4.2% in May, is expected by consensus forecasts to ease to 3.8%. Year-on-year core inflation, excluding food and energy, is projected to remain unchanged at 2.9%.

FAQ

What are the current levels of key U.S. Treasury yields?
The 10-year Treasury yield is at 4.622%, the 2-year yield is at 4.277%, and the 30-year bond yield is at 5.105% as of 6:02 a.m. E.T. on Tuesday.

How have market expectations for Federal Reserve rate hikes changed?
Markets now expect two Federal Reserve rate hikes by April next year, with the probability of a July 29 rate increase rising to 39%, up from 26.7% a week earlier, according to the CME's FedWatch tool.

What is driving the recent rise in oil prices?
Oil prices rose after President Donald Trump announced plans to blockade Iranian ports and impose 20% fees on cargo passing through the Strait of Hormuz, pushing WTI futures to $80.66 and Brent crude to $86.90.

What is expected from the upcoming U.S. inflation data?
Consensus forecasts anticipate that annual inflation will ease from 4.2% in May to 3.8% in June, while core inflation is expected to remain steady at 2.9% year-on-year.