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

• The Fed's rate-setting committee voted 11-1 to keep rates unchanged on Wednesday, with inflation already trending above the Fed's target before the February 28th conflict outbreak
• Iran and Israel exchanged strikes overnight, with Iran also attacking Gulf energy sites, pushing oil prices to $94.99 (U.S.) and $107.28 (Brent) per barrel before retreating on Friday
• Markets have eliminated all expected rate cuts for the year and now price in possible rate hikes, while European central banks also signal tightening as policymakers respond to war impacts

Summary

Treasury yields rose significantly on Friday amid growing investor concerns that the Federal Reserve may abandon planned rate cuts due to Middle East conflict-driven inflation pressures.

Key Data Points

• 10-year Treasury yield: Climbed 10 basis points to 4.38%
• 2-year Treasury yield: Rose 10 basis points to 3.932%
• 30-year Treasury yield: Increased to 4.953%
• U.S. crude oil: Down 1.2% to $94.99/barrel
• Brent crude: Down 1.3% to $107.28/barrel

Market Developments

The yield surge follows escalating Middle East tensions, with Iran and Israel exchanging strikes and Iranian attacks targeting Gulf energy infrastructure. The conflict, which began February 28, has intensified inflation concerns already running above the Fed's target.

The Federal Reserve's Open Market Committee voted 11-1 on Wednesday to hold rates unchanged as expected. However, markets have dramatically shifted expectations, removing all anticipated rate cuts for the year and now pricing in potential rate hikes instead.

According to Baird investment strategist Ross Mayfield, "The market has removed basically every rate cut from this year, and now is pricing odds of the hike." European central banks also paused rate decisions Thursday, with markets similarly pricing in potential hikes.

Policy Response

Treasury Secretary Scott Bessent indicated sanctions relief on Iranian crude stored in tankers may help ease oil price pressures. Israeli Prime Minister Netanyahu confirmed cooperation with the U.S. on reopening the Strait of Hormuz.

The hawkish pivot reflects concerns that elevated energy costs and labor market uncertainty will sustain inflationary pressures, forcing central banks globally to maintain or tighten monetary policy.