London's US Treasury market faced intense sell-off on Friday, with the benchmark 10-year U.S. Treasury yield soaring to 4.464%, reaching its highest level since July 2025. Despite U.S. President Trump's announcement to extend the deadline for reopening the Strait of Hormuz, the market's pricing of geopolitical risk has shifted towards "long-term confrontation." Due to the continuous rise in energy prices (WTI crude oil at $96, Brent at $110), traders are pulling back Fed rate cut bets at an unprecedented pace.
Macro Background: Surge in Rate Hike Chances
According to LSEG money market data, the probability of a Fed rate hike in 2026 has surged to 75%. This marks a 180-degree turn from the consensus of "two rate cuts within the year" prior to the outbreak of war at the end of February. Deutsche Bank strategist Jim Reid noted that Trump's extension move is merely a "temporary measure" and does not alter the core impasse of Iran's refusal to negotiate.
Market Reaction and Risk Premium
The 2-year Treasury yield, most sensitive to interest rate policy, rose to 4.027%, hitting a new high since June last year. As news emerged that the Pentagon is considering sending 10,000 more troops to the Middle East, the risk premium in the bond market is being reassessed. The 30-year ultra-long bonds are also approaching the 5% mark, reflecting investors' deep concerns over inflation spirals and long-term war expenditures.
