US Treasuries edged higher as oil prices softened after the US paused its nearly two-week campaign of strikes against Iran, while traders eyed a roughly one-in-three chance of a Federal Reserve interest rate hike on Wednesday.
Yields were around two to three basis points lower across the curve, led by the 10-year note dipping to 4.65%, as Brent crude prices slid to around $90 a barrel. Treasury yields remain within 10 basis points of Friday’s peak, their highest level since January 2025.
A volatile geopolitical backdrop in the Middle East and a whipsawing oil price are keeping the bond market and Fed officials on edge. Chairman Kevin Warsh has abandoned the Fed’s long-standing practice of signaling the likely path of rates in advance, making the July meeting one of the least predictable in years.
Overnight-indexed swaps implied a roughly 36% chance of a quarter-percentage-point rate increase this week. By contrast, almost all economists surveyed by Bloomberg see the Fed keeping rates unchanged. Traders are fully pricing in a hike by September.
“There should be a good ‘family fight’ on the inflation outlook and forward policy-settings,” said John Brady, managing director at RJ O’Brien. “Our sense this morning is that this Warsh Fed will use this meeting to prepare the markets for a September rate-hike.”
The bulk of Treasury losses during July has been powered by rising real yields, which are adjusted for inflation and serve as a proxy for the bond market’s expectations for the Fed’s so-called neutral rate — a policy setting that neither slows nor boosts the economy.
As of last week’s yield peaks, Treasuries had climbed some 20 to 30 basis points higher for July. So far this month, the broad US Treasury index has lost 1% as of Friday, while a long-dated index of 20-year plus bonds has slid 3.3%, on course for its weakest month since March.
The trading session for Monday will also feature the start of a compressed auction cycle with 2- and 5-year note sales at 11:30 a.m. and 1:00 p.m. in New York.
“Oil will continue to drive much of today’s Treasury market price action,” said John Canavan, lead analyst at Oxford Economics. Traders will also focus on “today’s two-year and five-year Treasury note auctions.”
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