Treasuries erased declines that pushed the two-year note’s yield to a new 2026 high as the market responded to oil-price fluctuations caused by the US war on Iran.
After rising with oil prices before US trading hours as the broader Middle East conflict escalated, with Iran and Israel trading fire, Treasury yields retreated to session lows on ceasefire reports. The two-year note’s was about a basis point lower on the day near 4.14% after nearly reaching 4.20%, the highest level since February 2025.
The oil price surge unleashed when the US attacked Iran in late February continues to be a principal driver of Treasury yields, having stoked US inflation and inflation expectations and changed the consensus expectation for Federal Reserve policy to higher rates from lower ones.
At the same time, US economic resilience has bolstered the view that the Fed, newly led by Chairman Kevin Warsh, will raise rates by mid-2027. May employment data released Friday spurred Treasury yields higher as job creation that topped all forecasts.
Traders have resumed pricing in a quarter-point Fed hike by year-end and around a 20% chance of a second one in 2027. Before Friday’s jobs data, swap contracts linked to Fed decision dates were fully priced for an increase in March 2027.
“Resilience in the labour market makes it easier for a central bank to defend tighter policy warranted by higher inflation,” said Abbas Keshvani, director of Asia macro strategy at RBC Capital Markets in Singapore.
Yields on two and five-year Treasuries have risen more than 80 basis points since this year’s lows in March to 4.16% and 4.29% respectively. Those on benchmark 10-year debt have risen more than 60 basis points to 4.55%.
Goldman Sachs Group Inc economists say they no longer expect the Fed to cut interest rates this year due to a stronger-than-expected labour market. BNP Paribas analysts now forecast three quarter-point rate hikes starting in December, having previously expected the US central bank to keep interest rates steady in a 3.5% to 3.75% range this year. JPMorgan Chase & Co sees 10-year yields ending the year higher at 4.70%.
Traders are also wagering that inflation figures this week will show the biggest surge in consumer prices in several years, adding to the case for higher rates.
“Benchmark US 10-year yields at 4.57% are likely to climb further this week unless Wednesday’s US CPI data comes in surprisingly weak”, says Garfield Reynolds, Markets Live Strategist.
President Donald Trump, in an interview with NBC’s Meet the Press, sought to push back against market expectations for higher interest rates, saying there is “no reason” for the Fed to hike. Raising the benchmark rate “is the wrong thing to do,” Trump said. “We should actually lower interest rates.”
Warsh presides over his first Federal Open Market Committee meeting on June 16-17. With no rate change expected from it, investor focus is on any changes to the policy statement. At the last meeting in April, three FOMC members voted against the statement because they objected to its inclusion of language indicating the next move could be a rate cut. Since then, other Fed officials have said they’ve gained sympathy for that view.
“Recent positive job gains, a low unemployment rate, and elevated inflation significantly increase the likelihood that the Fed will raise interest rates this year,” Jason Schenker, president and chief economist at Prestige Economics LLC, wrote in a note.
