Treasury yields climb as traders price higher odds of Fed hikes

U.S. Treasury yields moved higher Tuesday, a sign that bond traders are raising the odds of more Federal Reserve rate increases. For everyday investors, the move matters because Treasurys are a core benchmark for how markets price interest rates across the economy.

CNBC reported that the 10-year Treasury yield was above 4.622% at 6:02 a.m. ET, up by more than 1 basis point. A basis point is one-hundredth of a percentage point, so a 1 basis point move equals 0.01 percentage point.

The 2-year Treasury yield, which CNBC described as more sensitive to near-term Fed policy, rose by more than 1 basis point to 4.277%. The 30-year Treasury yield gained nearly 1 basis point to 5.105%.

Bond yields and bond prices move in opposite directions. When investors demand a higher yield to hold a bond, the bond’s price falls. That relationship is central to reading Treasury moves: rising yields usually point to investors requiring more return, often because they expect higher inflation, higher policy rates, or more uncertainty.

Oil and Fed expectations are driving the move

The shift came as traders watched a more fragile Middle East ceasefire and higher oil prices, according to CNBC. President Donald Trump announced plans Monday to blockade Iranian ports and apply 20% fees on cargo moving through the Strait of Hormuz, CNBC reported.

Oil prices rose sharply Tuesday. West Texas Intermediate futures were last up 3.2% at $80.66 a barrel, while Brent crude, the global benchmark, climbed 4.3% to $86.90, according to CNBC.

Higher oil prices can complicate the inflation picture because energy is a major input across the economy. CNBC reported that traders are increasingly pricing in two Fed rate increases by April next year, citing CME’s FedWatch tool. That tool showed a 39% probability of a July 29 rate hike, up from 26.7% one week earlier.

A Fed rate hike means the central bank raises its target for short-term interest rates. That can feed through to Treasury yields, especially shorter-dated maturities such as the 2-year note, because investors adjust bond prices to reflect the expected path of Fed policy.

Inflation data and Warsh testimony are next

Investors are waiting for June inflation figures due later Tuesday. CNBC reported that consensus forecasts call for annual inflation to cool to 3.8% from 4.2% in May.

Core inflation, which excludes food and energy because those categories can swing sharply, is expected to remain at 2.9% year over year, according to CNBC. The core reading is closely watched because it can give investors a clearer view of underlying price pressure.

Fed Chairman Kevin Warsh is also scheduled for his first congressional testimony this week, CNBC reported. He is set to appear before the House Financial Services Committee on Tuesday and the Senate Banking Committee on Wednesday to discuss the U.S. economy.

Treasury yields had already risen across maturities Monday. CNBC reported that the 10-year yield climbed 4 basis points and the 2-year yield rose more than 6 basis points after Trump’s announcement on Iranian ports and Strait of Hormuz cargo fees.

This story draws on original reporting from CNBC.