Treasury yields fall as traders rethink Fed rate hikes after Powell comments

• The 10-year Treasury yield fell 2 basis points to 4.321%, while money markets now price in zero Fed rate cuts for the rest of 2026, with futures briefly showing a 52% probability of a rate increase by year-end
• Fed Chair Powell indicated inflation expectations are stable despite elevated energy prices driven by the U.S.-Iran war and the closure of the Strait of Hormuz shipping route
• Secretary of State Marco Rubio stated U.S. objectives in Iran would take 'weeks, not months' to achieve, while President Trump reportedly expressed willingness to end hostilities even if the Strait remains closed

Treasury Yields Decline as Markets Reassess Fed Rate Path

Market Movement:

U.S. Treasury yields fell Tuesday morning as investors reconsidered Federal Reserve policy expectations. The 10-year yield dropped 2 basis points to 4.321%, while the 2-year and 30-year yields declined 1 and 2 basis points respectively to 3.816% and 4.892%.

Fed Policy Outlook:

Money markets now overwhelmingly price in zero rate cuts for the remainder of 2026, according to CME's FedWatch tool. Futures traders briefly pushed the probability of a rate increase by year-end to 52%. Fed Chair Jerome Powell stated Monday that inflation expectations remain anchored despite rising energy prices, though his full comments were not detailed in the report.

Geopolitical Tensions:

The U.S.-Iran conflict continues dominating investor attention. The Strait of Hormuz, a critical shipping route, remains largely closed, creating an oil supply disruption that has driven prices significantly higher. This situation is fueling both inflation concerns and recessionary fears, complicating the monetary policy outlook.

U.S. Secretary of State Marco Rubio indicated Washington's objectives in Iran would take "weeks, not months" to achieve. The Wall Street Journal reported President Trump expressed willingness to end U.S. military hostilities even if the strait remained closed.

Economic Data:

Investors await February JOLTS jobs data, scheduled for release at 10 a.m. ET Tuesday, for additional insights into labor market conditions.

Market Implications:

The combination of elevated oil prices, geopolitical uncertainty, and shifting Fed expectations creates a complex environment for fixed income markets, with traders balancing inflation risks against potential economic slowdown concerns.