* Fed funds futures price a 36% chance of a Wednesday hike
* Futures imply the benchmark rate could reach about 4.20% by April
* Fed left rates unchanged last month, signaled a hike later this year
July 24 – Benchmark 10-year U.S. Treasury yields dipped from 18-month highs on Friday as oil prices eased, though investors remained cautious ahead of the Federal Reserve’s policy meeting next week, which many believe could bring a hawkish surprise.
Oil prices have climbed as the Iran war escalates, reviving concerns over a more prolonged bout of inflation that could push the central bank toward higher rates.
“The reheating of the situation in the Middle East really got the market back on track to recognize there is a structural level of inflation that’s too high, that’s going to require higher rates,” said Robert Tipp, chief investment strategist and head of global bonds at PGIM Fixed Income.
Fed funds futures traders are now pricing in a 36% chance of a hike at the conclusion of the Fed’s two-day meeting on Wednesday, up sharply from 13% a week ago, according to the CME Group’s FedWatch Tool.
The 2-year note yield, which typically moves in step with Fed rate expectations, fell 2.94 basis points to 4.331%. It is heading for its largest one-week basis point increase since May 11 at 16 basis points.
The yield on benchmark U.S. 10-year notes fell 1.98 basis points to 4.683%. It is also on track for its largest weekly increase since May 11 with a gain of 14 basis points. The yield curve between 2- and 10-year yields steepened to 34.8 basis points.
Traders had pared back bets on rate increases after the United States and Iran reached a deal last month aimed at ending the war. Those bets were reignited, however, as the war reaccelerated. U.S. missiles struck targets across Iran on Friday, reaching as far as its Caspian coast, after President Donald Trump vowed “major military punishment” against Iran and its Houthi allies in Yemen for extending the war to a second major shipping chokepoint at the mouth of the Red Sea. Consumer price inflation data for June, released last week, showed prices moderating more than economists had expected, boosting hopes that the worst of the price pressures was over.
Still, one data release is unlikely to derail hikes as long as inflation remains well above the Fed’s target and the economy stays strong, Tipp said. Adding to price pressure worries, the U.S. imposed new tariffs of 10% and 12.5% on goods from 60 trading partners, including the EU and China, just as a temporary 10% global tariff expired.
Futures pricing shows expectations that the benchmark rate will rise to around 4.20% by April, from its current band of 3.50% to 3.75%. Fed Chairman Kevin Warsh’s preference for less forward guidance is adding to the uncertainty surrounding the Fed’s response to this new bout of higher energy costs. The Fed held interest rates steady last month, but policymakers expect a hike in borrowing costs later this year amid growing concerns about inflation lodged above the U.S. central bank’s 2% target. Data on Friday showed that activity in the vast U.S. services sector accelerated in July, aided in part by spending around the FIFA World Cup and the Independence Day holiday. Separately, sales of new U.S. single-family homes snapped a two-month skid in June, but higher mortgage rates and affordability challenges restrained the rebound and continue to sideline potential buyers from the housing market.
This article was generated from an automated news agency feed without modifications to text.
