The yield on 10-year US Treasury bonds rose to 4.58% during trading on Wednesday, its highest level since late May, after climbing by about 8 basis points in the previous session, amid growing concerns about a return of inflationary pressures as a result of escalating geopolitical tensions in the Middle East.
The rise in returns coincided with a nearly 10% increase in oil prices during the last two sessions, following US President Donald Trump’s announcement of the end of the ceasefire agreement with Iran, coinciding with the United States carrying out new strikes targeting Iranian sites, and canceling the exemption that allowed Tehran to export oil to global markets.
The attacks targeting ships in the Strait of Hormuz have also heightened concerns about the potential disruption of global oil supplies, which has increased expectations of higher inflation rates in the coming period, given the likelihood of continued increases in energy prices.
These developments were reflected in expectations for US monetary policy, as markets raised their bets on the Federal Reserve continuing to tighten its monetary policy, raising the probability of an interest rate hike during the September meeting to about 70%, compared to 58% the previous day, which supported the rise in Treasury bond yields.
US Treasury yields typically move in line with investors' expectations of inflation and interest rates, as higher inflation expectations lead investors to demand higher returns to compensate for the erosion of purchasing power.
Oil prices are also one of the most significant factors affecting inflation, due to their impact on transportation and production costs and the prices of goods and services.
Amid escalating tensions in the Middle East, investors are closely monitoring developments in energy markets, as these could put additional pressure on the Federal Reserve's decisions regarding the course of monetary policy in the coming months.
