U.S. Treasury yields dipped on Monday as bond markets received a reprieve from a spell of sharply rising borrowing costs. The two-year Treasury yield, which is sensitive to interest-rate expectations, fell to 4.24%. The benchmark 10-year note eased to 4.67%, while the 30-year Treasury bond yield retreated to 5.219% after reaching multi-year highs late last week.
Fixed-income traders registered immediate relief after U.S. President Donald Trump said direct talks with Iranian officials were set for Monday and that he had called off a planned military strike in hopes of negotiating a deal to reopen the Strait of Hormuz. The diplomatic development coincided with a dramatic move in global energy markets - crude benchmarks plunged by more than 4% - which in turn tempered inflation concerns tied to energy prices and eased pressure on yields.
Monday’s calmer action followed a punishing July for U.S. bond desks, when benchmark yields climbed sharply and long-term borrowing costs climbed to 19-year highs. Markets had been under strain throughout July amid an intensifying five-month confrontation between the U.S. and Iran, large swings in energy prices, and uneven signals from the Federal Reserve that fed fears of a prolonged period of higher interest rates.
Investors spent the final days of July weighing a mixed batch of macroeconomic data alongside the Fed’s latest policy call. While the central bank held its benchmark rate steady, three policymakers dissented in favor of an immediate hike. Market participants were further unsettled by Fed Chair Kevin Warsh stepping back from conventional forward guidance while reiterating a commitment to combat persistent inflation, leaving traders with less clarity about the future path of rates.
Inflation readings remain a concern. The June Personal Consumption Expenditures price index showed a modest easing in headline inflation, but core measures - which strip out volatile food and energy components - remained stubbornly above the Fed’s 2% annual goal. Alongside widening U.S. fiscal deficits and solid second-quarter GDP growth, markets continued to price in roughly a two-thirds probability of a 25-basis-point rate increase by year-end.
With energy prices retreating on Monday, traders are turning their attention to a packed U.S. data calendar this week, culminating in Friday’s nonfarm payrolls report. These labor-market releases will be pivotal in determining whether the recent surge in borrowing costs has run its course or if strong economic resilience will push yields back toward the multi-year highs seen in July.
Euro-area yields
Across the Atlantic, German yields were little changed to slightly softer. The two-year German yield fell to 2.766%, while the benchmark 10-year Bund yield held at about 3.155%. European bond desks likewise took comfort from the news of U.S.-Iran direct talks and the associated sharp drop in crude prices, which helped cool worries about energy-driven inflation.
The calmer start to the week contrasted with July’s momentum in European markets. German benchmark yields rose by roughly 30 basis points over the month to touch 15-year highs near 3.21% as investors digested a heavy docket of mixed macro signals. Preliminary data showed Eurozone second-quarter GDP growing by a resilient 0.4%, beating market forecasts, while July flash consumer-price data indicated headline inflation ticked up to 2.9% from 2.8% in June. Crucially, underlying core inflation accelerated to 2.5%, propelled by rising services costs and energy spillovers.
That combination of unexpectedly robust growth and sticky price pressures in July materially reinforced market expectations that the European Central Bank may opt for further monetary tightening.
Outlook
In the near term, market direction will likely hinge on incoming U.S. labor-market data and whether energy prices maintain their retreat. Friday’s payrolls report is set to be a focal point for traders assessing whether July’s jump in yields represented a peak or the start of a higher-for-longer regime.
For now, Monday’s developments provided a temporary easing in borrowing costs across the curve, as traders recalibrated models for inflation and central-bank action in light of the diplomatic opening and the sharp downward move in crude prices.