U.S. Treasury yields rose on Wednesday as escalating tensions in the Middle East, following strikes by both the U.S. and Iran, pushed oil prices higher and raised concerns about inflation. This comes amid stronger-than-expected U.S. economic data.
The benchmark U.S. 10-year Treasury note yield increased by 3.4 basis points to 4.489%, marking its largest daily gain in two weeks. This rise follows a 16-month high of 4.687% on May 19, driven by hopes of a U.S.-Iran agreement to reopen the Strait of Hormuz. However, diplomatic efforts have stalled, with Iranian attacks on Kuwait and U.S. military strikes near Hormuz disrupting the region, a key transit point for global oil and gas supply. U.S. crude oil prices rose 2.4% to $96 a barrel, while Brent crude increased by 1.8% to $97.77 per barrel.
Despite inflation risks tied to the Middle East conflict, Federal Reserve Bank of New York President John Williams stated that there is no need to change short-term interest rates. Market expectations have shifted from anticipating 50 basis points worth of cuts to pricing in about 20 basis points in hikes this year. The two-year U.S. Treasury yield, closely linked to Fed rate expectations, rose 2.9 basis points to 4.068%.
“For the most part, everybody's eyes are on what's going on in the Mideast and will continue to be.”
Tom di Galoma, managing director at Mischler Financial Group
U.S. economic data showed strength, with private payrolls increasing by 122,000 in May, surpassing the 117,000 estimate. The Institute for Supply Management's nonmanufacturing index rose to 54.5, exceeding expectations, while factory orders surged 4.8% in April, the largest increase since May 2025.
The breakeven rate on five-year U.S. Treasury Inflation-Protected Securities (TIPS) was at 2.537%, indicating market expectations of inflation averaging about 2.4% annually over the next decade.
Background
The ongoing conflict in the Middle East and its impact on oil prices have reignited inflation concerns, affecting global markets. The U.S. economy's resilience, as shown by recent data, adds complexity to the Federal Reserve's decision-making process regarding interest rates.
Looking ahead, investors will closely monitor developments in the Middle East and their impact on oil prices and inflation. Additionally, upcoming U.S. economic data, including the government payrolls report, will be crucial in shaping market expectations and the Federal Reserve's policy direction.
