- The yield on the benchmark 10-year U.S. Treasury note experienced significant intraday volatility, initially climbing to a high of 4.518% in early trading. It later retreated to 4.473% by the close, influenced by a marginal easing of geopolitical tensions, resulting in an inverted V-shaped pattern for the day.
- Global energy benchmark prices saw a notable increase, with Brent crude futures rising sharply by 4.2% to $94.95 per barrel. The ongoing blockade of the Strait of Hormuz has kept the risk premium in the oil market elevated, directly boosting inflation hedging demand across asset classes.
- The pricing logic in the federal funds rate futures market has undergone a substantial reversal. The CME FedWatch tool indicates that the probability of a 25 basis point rate hike at the Federal Reserve's December meeting has surged to 53.4%, reflecting the potential intervention of imported inflation pressures on the monetary policy path.
Geopolitical Maneuvering Reshapes Intraday Yield Curve
Liquidity in the U.S. Treasury market today was primarily influenced by alternating shocks from Middle Eastern geopolitical news. In early trading, reports from Iran's Tasnim News Agency about Tehran's delegation halting information exchanges with the U.S. heightened risk aversion and inflation concerns, quickly driving up yields across all maturities. Subsequently, U.S. President Trump confirmed on social media that negotiations were ongoing and mentioned obtaining a ceasefire commitment from relevant armed groups towards Israel. This news triggered short covering in the fixed income market, with both short and long-term yields significantly retreating from their highs. The two-year Treasury yield touched 4.09% intraday before ultimately narrowing down by 3.7 basis points to 4.051%.
Energy Supply Premium Triggers Inflation Expectation Reassessment
Supply-side shocks in the oil market are transmitting substantial inflation premiums to the fixed income market. West Texas Intermediate crude futures rose by 5.39% to $92.07 per barrel. The robust performance of energy prices is directly reflected in the breakeven curve of inflation-protected securities. The five-year Treasury Inflation-Protected Securities (TIPS) breakeven yield rose from 2.53% the previous trading day to 2.55%. Meanwhile, the ten-year TIPS breakeven yield remained stable at 2.413%, indicating that the market has systematically adjusted its long-term annualized inflation expectations upward. If geopolitical premiums continue to seep into core inflation, the real yield space for long-term Treasuries may face further reassessment.
Strong Macroeconomic Data Reinforces Fundamental Resilience
Amid sudden geopolitical events, U.S. domestic macroeconomic data continues to show unexpectedly strong expansion momentum. Data released by the Institute for Supply Management indicated that the May Manufacturing Purchasing Managers' Index surged to 50.4, the highest level since May 2022, significantly exceeding market expectations of 53.0. Additionally, revised data from the Commerce Department showed that April construction spending recorded a month-on-month growth of 0.4%, also surpassing market expectations. Although the day's trading was dominated by geopolitical developments, these solid real economy indicators provided strong fundamental support for long-term Treasury yields, limiting the downward movement of the yield curve following the easing of news.
Market Pricing Center Shifts Towards Rate Hike Scenario
The complexity of the current macroeconomic environment is thoroughly reshaping Wall Street's expectations for the Federal Reserve's policy path this year. At the beginning of the year, the market widely bet on about two rate cuts by the Federal Reserve, but the supply chain disruptions and high energy costs caused by Middle Eastern conflicts have severely constrained the room for monetary policy adjustments. The yield spread between the two-year and ten-year Treasury notes, reflecting economic forward expectations, currently remains at a positive 42 basis points, with the yield curve showing a normalization tilt. Based on the risk of high-sticky inflation returning, traders in the interest rate derivatives market have begun to substantively price in the scenario of rate hikes resuming this year. If subsequent core price indicators and commodity price trends resonate upwards, the Federal Reserve's policy stance may be forced to tighten towards a more restrictive range.
