According to Odaily, a deadlock in US-Iran peace talks sparked fears of Middle Eastern energy supply disruptions, triggering a sharp sell-off in US Treasuries on Monday. Confidence in receding inflation was shaken, leading markets to price in a potential Fed rate hike within months. Traders worried that persistently high energy costs would aggravate inflation and force a policy pivot.
On that day, crude oil surged over 7%, fueling inflation anxiety. Higher oil prices pushed up gasoline and diesel, feeding through transportation into broader consumer prices. The energy cost shock greatly complicated the Fed's inflation-fighting task, rapidly shifting market sentiment from cautious waiting to fears of tightening.
Treasury Yields Surge
The $31 trillion Treasury market saw sharp moves. The 10-year yield rose about 6 bps to near 4.5%, reflecting higher long-term inflation risk compensation, and set to lift borrowing costs across the economy. The two-year yield, most policy-sensitive, also added about 6 bps to 4.07%, directly pricing in near-term tightening.
Rate-Hike Bets Brought Forward
After Iran suspended indirect talks due to Israeli actions, geopolitical tensions escalated. Swaps now fully price a Fed rate hike by March 2027, with a 50% chance as early as October. Overnight index swaps also showed a sharp rise in year-end hike probability, marking a fundamental shift in rate expectations amid sticky inflation worries. (Source: Jin10)