Shorter-dated US Treasury yields ease in line with lower oil price

Shorter-dated U.S. Treasury yields eased on Tuesday, as hopes of a diplomatic breakthrough between the United States and Iran pushed oil prices lower, supporting expectations that the Federal Reserve would not need to hike interest rates imminently.

The yield on the 2-year note, which closely tracks expectations for Federal Reserve monetary policy, was down 1.7 basis points at 4.198%, easing after three ‌straight sessions of increases.

Tehran ⁠received ⁠a proposal from mediators for a 10-day ceasefire although the decision by the Iran-aligned Houthis to ​impose a naval blockade on Saudi Arabia on Monday risked further escalating the conflict, keeping Brent crude ​just below $90 a barrel, a five-week high.


U.S. inflation expectations have steadily eased this month even as oil prices remained elevated, with a market-based measure of one-year-ahead inflation falling below the Fed's 2% target for the first time ⁠since October 2024.

"Despite ‌the recent rally in oil prices, market-based measures of inflation ​have stayed ​well anchored," strategists at ANZ Research said in a note, adding ⁠that the Fed's credibility in inflation management, receding tariff effects, ​and a non-inflationary labour market were among several factors that explained ​the stability.

"This may be indicating that monetary policy is restrictive." Two-year yields have fallen more quickly than those for benchmark 10-year debt, an indication of investor belief that the Fed is under less pressure to raise rates.

Data last week showed U.S. consumer prices increased at a slower pace than anticipated in June, prompting investors ‌to rein in their bets on interest rate hikes.

Money markets largely expect the Fed to keep rates unchanged at 3.5%-3.75% at its ​July 28-29 meeting ​and have priced in ⁠a near 66% chance of a quarter-point hike by September.

The U.S. Fed is in a blackout period before its policy meeting next week and the U.S. economic calendar ​is light this week.

The benchmark U.S. 10-year yield was little changed at 4.598%.

With so much focus among investors on the outlook for inflation right now, an auction of inflation-linked debt later in the week could attract scrutiny.

The Treasury Department will sell $13 billion in 20-year bonds on Wednesday and $21 billion in 10-year Treasury Inflation-Protected Securities on Thursday.