NEW YORK: Treasury two-year yields climbing to their highest level since early 2025 as renewed tensions in Iran pushed up oil prices, fanning speculation that the Federal Reserve (Fed) will need to raise interest rates to combat inflation. 

The rate-sensitive two-year yield rose as much as three basis points to 4.24%, the highest since February 2025, while the benchmark 10-year yield added three basis points to 4.59%.

Brent crude jumped more than 4% after the United States and Iran exchanged fresh strikes, with the two sides offering conflicting statements on whether the Strait of Hormuz remained open. 

The advance in treasury yields reflects growing expectations that the Fed will raise rates soon to rein in price pressures from the rebound in global energy prices and signs of a resilient US economy.

Traders are almost fully pricing in a Fed rate hike in September, up from about a 66% probability a week ago, according to swaps compiled by Bloomberg.

“Markets are slightly more sensitive to the Iran headlines at the moment,” said Kenneth Crompton, head of rates strategy at National Australia Bank Ltd in Sydney.

“The market isn’t pricing a return to the conflict levels of March, but between the attacks that continued over the weekend and, secondarily, attacks on Russian refining capacity, there is a bit of wariness creeping back.” 

The rise in treasury yields comes ahead of this week’s US consumer and producer price data, the final inflation prints before the Fed’s next meeting on July 27 and 28.

Both headline and core consumer price index are likely to have eased slightly in June, though both are forecast to remain well above the Fed’s 2% target, according to a Bloomberg survey.

Fed chair Kevin Warsh will this week make his first congressional appearance since taking the helm and pledging to scale back forward guidance on the rate outlook.

The trading range for Treasury 10-year yields may be capped at 4.7%, though “that has the potential to be tested in coming days if the inflation data is less than benign”, said Damien McColough, head of fixed-income research at Westpac Banking Corp in Sydney. — Bloomberg