* Markets pricing in roughly 30% chance of Fed rate hike
* 7-year note auction seen as average
* 10-year, 30-year yields down for third straight day (Updates to afternoon trading)
NEW YORK, July 28 (Reuters) – U.S. Treasury yields fell on Tuesday, with the benchmark 10-year note on track for its first three-day decline in a month, as oil prices continued to ease on hopes for a lasting resolution to the U.S.-Iran conflict.
Traders were also bracing for the release of the Federal Reserve’s latest interest rate decision on Wednesday.
U.S. crude fell 3.68% to $79.55 a barrel and Brent dropped to $84.58 per barrel, down 4.23% on the day after falling more than 5% to a two-week low. Brent had topped $100 a barrel last week as tensions in the Gulf increased, but crude prices have since reversed on signs of cooling hostilities.
U.S. President Donald Trump said in a Fox News interview on Tuesday that there have been good talks with Iran but reiterated threats to target a fortified underground facility near one of Tehran’s main nuclear sites as well as bridges and other civilian targets if a deal is not made.
A Gulf source and a Western diplomat told Reuters that Oman has presented Iran with a plan backed by Gulf states to manage the Strait of Hormuz, including collecting voluntary fees for using it.
BENCHMARK YIELDS HIT ONE-WEEK LOW
The yield on the benchmark U.S. 10-year Treasury note fell 3.9 basis points to 4.602% after hitting a one-week low of 4.588%. The yield has fallen about 10 basis points over the past three sessions.
“With lower oil, less forward inflationary pressure, so then that helps rates back off a bit,” said JoAnne Bianco, partner and senior investment strategist at BondBloxx Investment Management in Chicago.
“From the perspective of disruption in oil supplies or much higher sustained oil prices, that’s associated with the resumption of the conflict,” said Bianco, who noted a mitigation of the conflict will cause oil prices to ease.
The yield on the 30-year bond shed 3 basis points to 5.095% and was also on track for a third straight drop, which would mark its longest run of declines since mid-June.
Even with the recent drops, yields on 10-year and 30-year bonds are poised for their biggest monthly increase since March, the first full month of the Iran war, as the turn higher in oil prices pushed up expectations for rate hikes from the Fed. The 2-year yield is on pace for a fifth straight monthly rise, its longest since a nine-month climb that ended in April 2022.
A closely watched part of the U.S. Treasury yield curve measuring the gap between yields on 2- and 10-year Treasury notes, seen as an indicator of economic expectations, was at a positive 32.3 basis points.
MARKET EYES WEDNESDAY POLICY DECISION
Expectations that the Fed will raise its benchmark interest rate by 25 basis points when it releases its latest policy statement on Wednesday stand at 29.4%, according to CME Group’s FedWatch tool, up from 25.7% a week ago, but there is likely a higher bar to a rate hike than the market is currently pricing in.
Analysts at BofA Global Research said in a note on Tuesday that they expect the Fed to hold rates steady with dissents from two committee members but they do see “strategic incentives” for Chairman Kevin Warsh to hike as it would differentiate him from former Chair Jerome Powell and “allow him to claim credit for any disinflation down the line, even if it’s mechanical.”
The 2-year U.S. Treasury yield, which typically moves in step with interest rate expectations for the Fed, dropped 4.8 basis points to 4.275% and was poised for its biggest daily drop since July 15.
A $44 billion auction of 7-year notes was seen as mediocre, with demand of 2.49 times the notes on sale roughly even with the average, according to analysts.
The breakeven rate on 5-year U.S. Treasury Inflation-Protected Securities (TIPS) was last at 2.169% after closing at 2.188% on Monday, its lowest close since November 2024.
The 10-year TIPS breakeven rate was last at 2.195%, indicating the market sees inflation averaging about 2.2% a year for the next decade.
(Reporting by Chuck Mikolajczak; additional reporting by Shashwat Chauhan in Bengaluru; Editing by Amanda Cooper, Mrigank Dhaniwala, Paul Simao and Nia Williams)
