US Yields Rise Amid Uncertainty Over Iran Diplomatic Talks
US Treasury Yields Rise Amid Uncertainty Over US-Iran Peace Talks and Oil Price Surge
New York, June 1 - U.S. Treasury yields climbed on Monday, but eased from their earlier highs, as investors sought clarity on the status of peace talks between the United States and Iran, which drove up oil prices. The yields rose sharply in the morning after Iran's Tasnim news agency reported that Tehran's negotiating team had stopped exchanging messages with the United States due to attacks on Lebanon. However, the yields later declined after U.S. President Donald Trump stated that talks with Iran were ongoing, contradicting the earlier report.
The yield on the benchmark U.S. 10-year Treasury note rose 2 basis points to 4.473% after reaching 4.518% earlier in the day. The market had been growing optimistic about the possibility of a peace agreement between the U.S. and Iran, which led to a decline in oil prices last week. However, the recent surge in oil prices, with U.S. crude rising 5.39% to $92.07 a barrel and Brent rising to $94.95 per barrel, has increased expectations for a Fed rate hike.
The two-year U.S. Treasury yield, which is a key indicator of interest rate expectations for the Federal Reserve, gained 3.7 basis points to 4.051% after hitting 4.09%, its highest since May 22. The persistently high crude prices, combined with the closure of the Strait of Hormuz, have altered market expectations for the Fed's actions this year. Markets are now pricing in a 53.4% chance for a hike of at least 25 basis points at the central bank's December meeting, up from about 45% in the prior session according to CME FedWatch.
Read also: Treasury Yields Experience Largest Increase in Two Weeks Following Release of Labor Market Data
| Yield | Previous | Current |
|---|---|---|
| 2-year U.S. Treasury yield | 4.048% | 4.051% |
| 10-year U.S. Treasury yield | 4.471% | 4.473% |
| 30-year U.S. Treasury yield | 4.989% | 4.989% |
The Institute for Supply Management reported that its manufacturing PMI advanced to 54.0 last month, the highest reading since May 2022 and above the 53.0 estimate of economists polled by Reuters. The yield on the 30-year bond fell 0.4 basis points to 4.989% after earlier climbing to 5.028%. The Commerce Department also reported that construction spending rose 0.4% after a downwardly revised 0.2% increase in March.
| Market Expectations | Previous | Current |
|---|---|---|
| Chance of a 25 basis point hike at the Fed's December meeting | 45% | 53.4% |
The breakeven rate on five-year U.S. Treasury Inflation-Protected Securities (TIPS) was last at 2.55% after closing at 2.53% on Friday, its lowest close since March 4. The 10-year TIPS breakeven rate was last at 2.413%, indicating that the market sees inflation averaging about 2.4% a year for the next decade.
Read also: US-Iran Tensions Spark Uptick in Oil Prices Amid Global Market Decline
Investor Takeaway
Investors should monitor developments in US-Iran diplomatic talks for potential impact on oil prices and Treasury yields.
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