Treasury yields increased on Thursday as oil prices rose on concerns about U.S. and Israeli access to the Strait of Hormuz and ahead of Friday's highly anticipated July jobs report. According to Reuters, the move represents a reversal from earlier this week when yields fell on optimism that a deal to reopen the strait would keep oil prices in check. The 2-year note yield rose 7.26 basis points to 4.252%, while the benchmark 10-year note yield increased 5.67 basis points to 4.674%. The yield curve between 2- and 10-year notes remained at 42 basis points. Oil prices rose by more than $3 a barrel on Thursday following news that an Iranian parliament committee is reviewing a bill that would ban U.S. and Israeli vessels from the Strait of Hormuz and fine violators up to a fifth of the value of their cargo.
The rise in oil prices reflects renewed concerns about energy-driven inflation after crude oil prices climbed significantly. As reported by Reuters, the latest surge comes as Iran has made a concerted diplomatic push with Gulf states, telling them explicitly that it will hit their oil, power and water plants unless they convince U.S. President Donald Trump to end U.S. strikes on Iran and instead seek a negotiated end to the war that began in February. Market strategist Will Compernolle from FHN Financial noted that 'it's better that the strait is open than it is not. But the longer that this back and forth goes on, the more I think it weighs on inflation expectations, it'll weigh on growth.' The ongoing uncertainty about actual negotiations adds complexity to market sentiment, with the pattern of energy prices creating a range-bound channel where both sides have incentives to de-escalate when prices get too high.
Fed funds futures traders are pricing in 59% odds of a rate hike at the Federal Reserve's September meeting, up from the previous 55% odds as traders reassess the impact of rising oil prices on inflation expectations. The two-year note yield rose 7.26 basis points to 4.252%, while the benchmark 10-year note yield increased 5.67 basis points to 4.674%. The recent surge in oil prices as the Middle East conflict intensified had raised expectations that the Federal Reserve might need to increase interest rates to curb inflation, which remains stubbornly above its 2% target. However, analysts expect 'overall core inflation drift lower' if oil prices stay in the current range over the next six to 12 months. With Fed policymakers still focused on elevated inflation, the July jobs report may not move markets much either way.
Friday's Bureau of Labor Statistics data showed nonfarm payrolls decreased 23,000 last month following substantial downward revisions to the prior two months, prompting traders to further dial back expectations for Federal Reserve interest-rate hikes. According to Bloomberg, two-year yields fell as much as nine basis points after the report before settling about five basis points lower near 4.19%, leaving them down the most on a weekly basis since May. Benchmark 10-year yields were down about nine basis points for the week at 4.65%, their first weekly decline in three weeks. Traders are now pricing about a roughly 40% chance of a rate hike at the next scheduled decision in September, compared to closer to 60% before the data. The data suggested the labor market may be facing challenges after surprising strength earlier this year, which had fueled investor bets on Fed hikes.
Traders are waiting on Friday's highly anticipated jobs report for July, which is expected to show that employers added 80,000 jobs last month with the unemployment rate staying steady at 4.2%. The next major economic data is US consumer prices figures due on Wednesday, with the surge in energy prices stemming from the U.S.'s war with Iran reigniting worries regarding inflation. As reported by Bloomberg, Fed Chairman Kevin Warsh's refusal to provide forward guidance further complicates the market's response, while President Trump reiterated his preference for lower interest rates in an interview with Punchbowl News. The upcoming trio of large auctions next week, including a $58 billion three-year note Tuesday, a $42 billion 10-year note Wednesday and a $25 billion 30-year bond Thursday, are expected to draw the highest yields since early 2025.
