U.S. Treasury yields fall as risk-off bids offset hawkish Fed talk
U.S. Treasury yields are heading for their first weekly decline in three weeks as flight-to-safety demand outweighs rising oil prices and mixed signals from Federal Reserve officials.
Yields on benchmark U.S. Treasuries fell on Friday, putting the 10-year note on track for its first weekly decline in three weeks. The 10-year yield dropped 2.8 basis points to 4.541%, while the 30-year bond shed 3.3 basis points to 5.064%. Both maturities had climbed for two straight weeks prior to this session.
The bond rally materialized despite a sharp surge in crude oil prices driven by escalating geopolitical tensions. Brent crude climbed 4.64% to $88.14 a barrel and U.S. crude jumped 4.74% to $82.69. The moves reversed earlier declines and pushed prices to one-month highs following recent infrastructure attacks amid intensifying hostilities between the U.S. and Iran.
Instead of pricing in higher inflation from energy costs, investors appeared to treat government debt as a safe haven. "We're seeing a similar move in the bond market with, despite the higher oil prices, bond yields are moving lower today, so maybe bonds acting as a bit of that flight to safety trade," said Mona Mahajan, head of investment strategy and asset allocation at Edward Jones.
The declines in yield also reflect a shift in interest rate expectations following cooler-than-anticipated U.S. consumer and producer price data. According to CME FedWatch, the probability of a 25 basis point rate hike in July has tumbled to 14.4%, down sharply from slightly over 40% on Monday. However, the market still expects a 57.1% chance of a hike at the Federal Reserve's September meeting.
Those market probabilities are at odds with recent rhetoric from central bank officials. Federal Reserve Vice Chair Philip Jefferson indicated he would support raising rates if inflation does not show near-term improvement, though he currently favors holding borrowing costs steady. Earlier in the day, Dallas Federal Reserve President Lorie Logan explicitly called for "modestly higher" interest rates, while other officials, including Chairman Kevin Warsh, flagged ongoing inflation concerns.
"The market is still not sure what to do with all this information - you have the Fed sounding extremely hawkish, the data coming in not as hawkish, but it's also one reading," said Gennadiy Goldberg, head of U.S. rates strategy at TD Securities. The two-year yield, which closely tracks Fed rate expectations, fell 2.2 basis points to 4.134%. The closely watched gap between two-year and 10-year yields stood at a positive 36.9 basis points.
Global sovereign moves
In Asia, Indian inflation data showed declines in food and energy costs were more than offset by rising prices for capital and consumer goods. In Europe, the Czech Finance Ministry said it will reduce planned bond issuance by 130 billion crowns after strong demand for recent retail offerings. The ministry sold 74 billion crowns in a first round, with two more offerings scheduled for later this year, while overall gross borrowing needs for 2026 remain largely unchanged.
Long-term U.S. inflation expectations remained contained, with the 10-year Treasury Inflation-Protected Securities breakeven rate at 2.245%. This indicates the market anticipates inflation averaging about 2.2% annually over the next decade. The five-year TIPS breakeven rate was last at 2.271%.
