Treasury yields climb as fear grows that Fed rate cuts are off the table

Treasury yields jumped on Friday as investors began to fear that the Federal Reserve may not lower interest rates at all this year, as the war in the Middle East threatens to drive inflation higher.

The 10-year Treasury yield — the benchmark for U.S. government borrowing — added nearly 10 basis points to 4.382%. The 2-year note yield — more sensitive to short-term Fed rate decisions —traded at 3.915%, up more than 8 basis points. Even the 30-year bond yield rose almost 10 basis points, to 4.948%.

One basis point equals 0.01%, or 1/100th of 1%, and yields and prices move inversely to one another.

The sell-off in bonds came after Iran and Israel exchanged strikes overnight, with Iran launching new attacks against energy sites in Kuwait and elsewhere in the Persian Gulf. With no end in sight to the escalation, investors are positioning for a more hawkish stance from the Fed as higher global oil prices reshape the economic backdrop.

“The backdrop domestically is less friendly than it was a couple weeks ago too, because the Fed has kind of reversed course. The market has removed basically every rate cut from this year, and now is pricing odds of the hike,” Baird investment strategist Ross Mayfield said to CNBC.

Mayfield referred to the fact interest rate futures traders are now pricing in almost a 1-in-5 chance of a rate hike in June, and no chance of a rate cut, based on probabilities calculated in the CME FedWatch tool.

Inflation was already trending above the Fed’s target even before energy costs spiked at the outbreak of the Iran war on Feb. 28. The Fed’s rate-setting Federal Open Market Committee voted 11-1 on Wednesday to leave its key interest rate unchanged at the current 3.50% to 3.75%.

Central banks in Europe also held rates steady this week as policymakers grappled with the impact of the war, with markets increasingly pricing in rate increases this year in order to contain higher prices.

Oil prices weakened a little on Friday, with U.S. West Texas Intermediate prices dipping 1.2% to $94.99 a barrel, and Brent crude, the global benchmark, easing 1.3% to $107.28. Before the attacks on Iran began, Brent traded at about $72.50 a barrel.

Treasury Secretary Scott Bessent indicated that U.S. sanctions on Iranian crude oil stored on tankers could be lifted to help ease price pressures. Israeli Prime Minister Benjamin Netanyahu said his country was assisting the U.S. “in intel and other means” to try and reopen the Strait of Hormuz.