Oil Price Surge Drives US Treasury Yields to Two-Month Highs
Escalating US-Iran military strikes have pushed crude prices to $91 a barrel, triggering a bond market selloff that revives the possibility of a Federal Reserve interest rate hike next week.
US Treasuries experienced a broad selloff on Tuesday, driving benchmark 10- and 30-year yields to their highest levels in almost two months. The 10-year yield climbed as high as 4.64%, a peak not seen since late May, while the broader market saw declines of two to four basis points across maturities. Mirroring the shift in fixed income, the US dollar advanced against a basket of major currencies as investors recalibrated their expectations for monetary policy.
The sudden repricing is rooted in escalating geopolitical tensions. Brent crude, the international benchmark, surged to $91 a barrel amid a tenth consecutive day of military strikes between the US and Iran, even as mediators attempted to revive a truce.
“Today’s move is largely just a function of the continued rise in energy prices,” explained Izaac Brook, a rates strategist at RBC Capital Markets. Brook added that the bearish momentum in bonds accelerated once yields breached critical technical levels of 4.20% for the two-year note and 4.60% for the 10-year note. Thinner liquidity conditions typical of the summer months further amplified the volatility.
For market participants, the surge in yields has completely erased the bond rally triggered by a softer-than-expected inflation report earlier this month. The rapid reversal underscores how external supply shocks can quickly derail disinflation trends and alter central bank forecasts.
Traders are now pricing in a roughly 20% probability that the Federal Reserve will raise interest rates at its upcoming July policy meeting. This shift arrives as policymakers enter their customary quiet period. Fed Chairman Kevin Warsh and other officials have consistently warned over recent weeks that inflation remains a primary concern for the central bank.
The prospect of tighter monetary policy is supported by evidence that the broader economy retains significant momentum. The Philadelphia Fed’s services-sector survey revealed that activity expanded for the first time since October 2024. This combination of persistent inflation risks and a resilient domestic economy suggests the central bank retains the flexibility to maintain or even increase borrowing costs, leaving bond market valuations vulnerable to further downside.
