US | Treasury yields rise as geopolitical risks resurface

Summary

The renewed escalation in Iran has pushed Treasury yields back to early-2025 levels, as markets again weigh the impact of higher oil prices on both the inflation and the economic growth outlook.

Key points

• Key points:
• While markets still expect the Fed to remain on hold next week, conviction slipped this week—odds fell from 90% to 65% after this week’s geopolitical developments.
• The risk repricing has pushed Treasury yields back to levels last seen in early 2025, with the 2-year yield reaching 4.4% and the 10-year yield climbing to 4.7% this week.
• The corresponding rise in real yields and stable breakeven inflation rates suggest that markets are assigning relatively little weight to a deterioration in the inflation outlook.
• It rather indicates that the recent increase in nominal yields has been driven primarily by a rebound in the term premium from its end-June lows.
• This explains why the dollar has stopped appreciating. Markets are demanding a higher term premium rather than repricing the short-term interest rate path.

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