U.S. Treasury yields were largely unchanged near multi-year highs on Monday as bond markets paused after a sharp sell-off.
Investors are now preparing for a crucial Federal Reserve policy decision while also monitoring the impact of the worsening energy crisis in the Middle East.
10-Year Treasury Yield Holds Near 5%
The benchmark 10-year U.S. Treasury yield traded around 4.978%, remaining just below the psychologically important 5% level.
The yield briefly moved above that threshold on Friday before pulling back.
Meanwhile, the 30-year Treasury yield held near 5.353% as traders assessed the balance between long-term inflation risks and concerns over rising government debt supply.
2-Year Yield Remains Sensitive to Fed Policy
The policy-sensitive 2-year Treasury yield edged higher to around 4.643%.
Shorter-dated bonds have faced some of the strongest selling pressure in recent sessions because they are highly sensitive to changes in Federal Reserve interest-rate expectations.
As traders reduced expectations for a near-term policy pause and increased bets on additional rate hikes, short-term Treasury yields moved sharply higher.
The adjustment reflects expectations that the federal funds rate could remain higher for longer.
Markets Price in Another Federal Reserve Rate Hike
Central bank decisions are expected to dominate global bond markets this week.
Financial markets are currently pricing in an 86% probability that the Federal Reserve will raise its benchmark interest rate by 25 basis points at its Sept. 15-16 meeting.
Traders are also assigning strong odds to another increase in December.
Those expectations strengthened after Friday’s U.S. inflation report showed headline consumer inflation holding at 3.4%.
Core inflation also increased by 0.3% month over month.
Inflation Concerns Keep Pressure on Bond Markets
UBS strategists said markets appear to be pricing in a limited number of additional rate increases rather than the beginning of an entirely new tightening cycle.
However, another energy-driven inflation shock could make it difficult for central banks to ease monetary policy.
Higher oil and gas prices could increase inflationary pressure, giving policymakers less room to tolerate renewed price growth.
This risk remains particularly important as energy markets continue to react to geopolitical tensions in the Middle East.
Oil Prices Add to Inflation Risks
Brent crude oil prices rose another 3% on Monday, trading near $112 per barrel.
The increase followed new military strikes on infrastructure in Saudi Arabia, including an attack on a major oil pipeline.
Further advances by Yemen’s Houthi rebels have also increased concerns over shipping routes in the Red Sea.
Supply fears intensified after a diplomatic meeting in Oman between Iran and Gulf Arab states was postponed.
The talks were expected to focus on efforts to reopen the Strait of Hormuz, a critical route for global energy supplies.
Global Central Banks Take Center Stage
The Federal Reserve is not the only major central bank under scrutiny this week.
The Bank of England is scheduled to meet on Thursday as policymakers confront rising energy costs and renewed stagflation concerns.
The Bank of Japan is also expected to make a policy decision on Friday.
Markets widely expect the BOJ to raise borrowing costs by 25 basis points to 1.25%.
Together, these meetings could have a significant impact on global bond yields and currency markets.
German Bond Yields Hold Near Multi-Year Highs
European government bond yields were also relatively stable on Monday.
The benchmark 10-year German Bund yield held at around 3.511%, remaining near its highest level since 2011.
German yields have now recorded five consecutive weekly increases.
The policy-sensitive 2-year German Schatz yield also remained near 3.197%, close to its highest level since October 2023.
Investors continue to assess the impact of the European Central Bank’s latest interest-rate increase while also preparing for further policy tightening from other major central banks.
ECB Warns About Rising Inflation Risks
European Central Bank policymaker Peter Kazimir warned that eurozone inflation risks may be moving above already elevated forecasts.
Higher natural gas and electricity prices are creating fresh concerns over the inflation outlook.
Kazimir stopped short of directly calling for another rate increase.
However, he stressed that the ECB remains ready to act if economic data shows that further tightening is necessary.
Italian and French Bond Yields Remain Elevated
Italian 10-year government bond yields traded near 4.38%.
The spread between Italian and German bonds remained relatively stable as markets prepared for another wave of sovereign debt issuance.
French 10-year government bond yields held around 4.45%.
Meanwhile, French 30-year yields remained close to their highest levels since 2003.
Concerns over France’s widening structural deficit continue to influence long-term borrowing costs.
Fed Expectations Remain the Main Driver
Treasury yields remain near multi-year highs as investors focus on the Federal Reserve, inflation and energy prices.
The combination of persistent inflation, rising oil prices and geopolitical instability has strengthened expectations that interest rates could remain restrictive for longer.
The upcoming Fed decision will therefore be closely watched for signals about the future path of U.S. monetary policy and Treasury yields.
