Treasury yields jumped Friday as investors began to worry that the Federal Reserve might not cut interest rates at all this year as war in the Middle East threatens to send inflation soaring.
The 10-year Treasury yield — the benchmark for U.S. government borrowing — added nearly 10 basis points to 4.382%. The yield on the 2-year bond – more sensitive to the Fed’s short-term rate decisions – traded at 3.915%, up more than 8 basis points. Even the 30-year bond yield rose almost 10 basis points, to 4.948%.
One basis point is 0.01%, or 1/100th of 1%, and yields and prices move inversely to each other.
The bond sale came after Iran and Israel exchanged strikes overnight, with Iran launching new attacks on energy sites in Kuwait and elsewhere in the Persian Gulf. With no end to the escalation in sight, investors are positioning themselves for a more hawkish stance from the Fed as rising global oil prices reshape the economic backdrop.
“The domestic backdrop is also less favorable than a few weeks ago because the Fed has sort of reversed course. The market has removed virtually all of this year’s rate cuts and is now pricing in the odds of a hike,” Baird investment strategist Ross Mayfield told CNBC.
Mayfield referred to the fact that interest rate futures traders now incorporate nearly one in five chance of a rate hike in Juneand no chance of rate cuts, based on the probabilities calculated in the CME FedWatch tool.
Inflation was already above the Fed’s target even before energy costs exploded with the outbreak of war in Iran on February 28. The Fed’s Federal Rate-Setting Committee voted 11-1 Wednesday to leave its key interest rate unchanged at the current 3.50% to 3.75%.
Central banks in Europe too kept rates stable this week, as policymakers grappled with the impact of the war, with markets increasingly pricing in rate hikes this year in an effort to contain rising prices.
Oil prices weakened slightly on Friday, the United States West Texas Intermediate prices down 1.2% to $94.99 per barrel, and Brent crudethe global benchmark, down 1.3% to $107.28. Before the attacks on Iran began, Brent crude was trading at around $72.50 per barrel.
Treasury Secretary Scott Bessent said U.S. sanctions against Iranian crude oil stored on tankers could be lifted to help alleviate pricing pressures. Israeli Prime Minister Benjamin Netanyahu said his country was helping the United States “with intelligence and other means” in trying to reopen the Strait of Hormuz.
