Treasury yields hold at 4.47% as U.S.-Iran ceasefire frays

The 10-year Treasury yield held at 4.47% Friday as a fraying U.S.-Iran ceasefire reintroduced geopolitical risk into bond markets.

The 10-year Treasury yield held at 4.473% Friday as a fraying U.S.-Iran ceasefire reintroduced geopolitical risk into bond markets, with investors awaiting core inflation data that could reshape Federal Reserve rate expectations.

"Washington remains committed to finding a solution to the conflict despite the latest escalation," a U.S. official said Thursday, according to an MS Now report. The official's comments came after renewed missile strikes between the two sides this week further strained the already-fragile ceasefire agreement.

The 2-year Treasury yield, which tracks short-term Fed rate expectations, held at 4.168%, while the 30-year bond yield stood at 5.054%. Oil prices edged lower, with WTI crude falling 0.26% to $71.88 a barrel and Brent crude declining 0.28% to $76.12, as traders weighed the risk of supply disruption from the Strait of Hormuz against the possibility of a diplomatic resolution. Treasury yields had spiked earlier in the week after President Trump told the NATO summit in Ankara that the ceasefire was "over," before paring those gains Thursday.

The combination of geopolitical uncertainty and incoming inflation data creates a binary risk for bond markets. If core inflation prints above the 0.3% monthly consensus, the 10-year yield could test the 4.60% resistance level as the market reprices the timing of Fed rate cuts. A below-consensus reading, combined with de-escalation in the Middle East, could push yields back toward 4.30%. The next Fed meeting is scheduled for late September, with OIS markets currently pricing a 45% probability of a quarter-point cut.

The Strait of Hormuz handles about 21% of global oil consumption, making any disruption a direct threat to energy prices and, by extension, inflation expectations. The last time U.S.-Iran tensions escalated to this level was in early 2020, when a U.S. airstrike killed Qassem Soleimani. At that time, WTI crude spiked above $65 a barrel within days, while the 10-year Treasury yield fell 15 basis points over the following two weeks as investors rotated into safe-haven assets.

The current situation differs in one key respect: inflation is already above the Fed's 2% target, limiting the central bank's ability to respond to a supply shock with easier policy. Core PCE, the Fed's preferred inflation gauge, stood at 2.8% in the most recent reading, well above the 2% target. A sustained oil price rally driven by geopolitical disruption would complicate the Fed's path, potentially forcing it to hold rates higher for longer even as economic growth slows.

The upcoming core inflation data, due for release next week, will provide the next directional signal for Treasuries. Economists surveyed by Bloomberg expect core CPI to rise 0.3% month-over-month, which would keep the annual rate at 3.4%. A print at or above that level would reinforce the narrative that the Fed's last mile of disinflation remains the hardest, reducing the probability of a September cut. Conversely, a softer reading could revive bets on earlier easing, with the 2-year yield potentially falling below 4% for the first time since May.

The dollar index consolidated near recent highs Friday as traders awaited the inflation data, while the S&P 500 traded 1.2% below its July 8 close, reflecting headwinds from both geopolitical uncertainty and the prospect of higher-for-longer rates. Defense sector stocks outperformed, with the S&P 500 Aerospace & Defense index rising 3.4% this week as investors priced in increased military spending.

This article is for informational purposes only and does not constitute investment advice.