US Treasury yields hit multi-month highs as Fed rate hike expectations surge to 50% after Middle East tensions shake markets

US Treasury yields rise: Rising tensions in the Middle East are starting to show up in financial markets, and bond investors are reacting quickly. Instead of expecting interest-rate cuts, traders are now preparing for the possibility that rates could actually go up again, as per a report.

US Treasury Selloff: Why Bond Yields Are Rising Again

US Treasuries saw a sharp selloff on Friday, pushing yields higher across the board. The move followed reports that the US is sending additional warships and Marines to the region, adding to concerns that the conflict could drag on and fuel inflation, as per a Bloomberg report.

Fed Rate Hike Odds Jump to 50% Amid Middle East Tensions

As a result, markets are now pricing in about a 50% chance of a Federal Reserve rate hike by October.

How the Iran Conflict Is Fueling Inflation Concerns

Gennadiy Goldberg, head of US rates strategy at TD Securities, explained that, “The Treasury market appears to be worried about further inflationary pressures as the conflict in Iran both escalates and drags on,” adding, “The market is no longer pricing in rate cuts in 2026 and is now starting to price in some chance of rate hikes, which is pushing yields sharply higher,” as quoted by Bloomberg.

Why Markets No Longer Expect Fed Rate Cuts in 2026

Just a few weeks ago, expectations looked very different. Before the US attacked Iran on February 28, traders were anticipating two rate cuts this year. Now, those expectations have completely shifted, with no cuts priced in for 2026 and even some chance of hikes entering the picture.

Bond Market Reaction: 5-Year and 10-Year Treasury Yields Hit Key Levels

The impact is already visible in bond yields. Short-term yields, which are more sensitive to Fed policy, rose the most. The five-year yield climbed above 4% for the first time since July, while the 10-year yield reached 4.39%, its highest level since August, as reported by Bloomberg.

Global Central Banks Stay Cautious on Interest Rates

Central banks are also taking a cautious stance. The Federal Reserve, European Central Bank, and Bank of England all held rates steady this week, but signaled they are ready to act if inflation pressures increase. Policymakers are closely watching energy prices, which have been rising as the conflict continues.

What Jerome Powell and Fed Officials Are Saying About Inflation

In the US, Fed Chair Jerome Powell said more progress on inflation is needed before cutting rates, while Governor Christopher Waller noted that higher oil prices could complicate the outlook, even as the job market shows signs of weakness.

How Oil Prices and War Fears Are Shaping Market Expectations

The shift in sentiment marks a sharp turnaround from earlier this year, when concerns about artificial intelligence disruption and stress in private credit markets had pushed investors toward safer assets like Treasuries. That rally helped February become the market’s best month in a year, but losses in March have now erased most of those gains, as per the report.