U.S. Treasury Yields Edge Lower; Fed Rate Hike Probability Around 30%
Alina Collins
The 10-year Treasury yield slipped to 4.65% Monday as softer oil prices eased bond-market nerves, but yields are still up 20–30 bp in July and the market has fully priced in a September rate hike — Wednesday's Fed decision is the first real test.
Why did yields pull back?
The trigger: the U.S. paused airstrikes on Iran → Brent crude fell to roughly $90 a barrel → lower oil eased inflation expectations, lifting bond prices modestly.
The 10-year yield dipped to 4.65%, about 2–3 basis points below last week's peak.
This means → this is a breather, not a reversal. Yields remain near their highest since January 2025.
How bad has July been for bonds?
Over the full month, Treasury yields have climbed roughly 20–30 basis points. The broad U.S. Treasury index is down 1% for July.
Long bonds got hit harder: the 20-year-plus index fell 3.3%, on track for the worst month since March.
The main driver is rising real yields — yields adjusted for inflation. In plain terms = the market now believes the Fed's "neutral" interest rate is higher than previously thought, which means elevated rates could last longer.
A ~30% hike probability — why do economists disagree with the market?
Overnight index swaps (OIS — derivatives that reflect the market's rate expectations) price a 36% chance the Fed raises rates by 25 bp on Wednesday.
Yet nearly every economist surveyed by Bloomberg expects the Fed to hold steady.
This means → economists focus on fundamentals; the market focuses on risk premia and positioning. The gap itself signals deep uncertainty about the policy path.
One thing both sides agree on: the market has fully priced a September hike.
What is the debate inside the Fed?
RJ Financial managing director John Brady sees "an intense internal debate over the inflation outlook and policy path" — he believes Warsh's Fed may use this meeting to lay the groundwork for a September hike.
This reflects a broader shift: Fed Chair Kevin Warsh has abandoned the longstanding practice of telegraphing rate moves → making this the hardest-to-call meeting in years.
Put simply = the Fed used to give spoilers; now it doesn't, so the market is flying blind and volatility rises.
What other variables matter this week?
Oxford Economics chief analyst John Canavan flagged oil prices as the dominant force for Monday's bond trading.
Supply adds pressure too: a compressed auction cycle begins Monday — 2-year notes at 11:30 a.m. ET, 5-year notes at 1:00 p.m. — concentrated issuance could amplify swings.
This means → multiple risks stack up this week: the rate decision + Treasury auctions + Middle East tensions + oil. Any surprise could push yields sharply higher again.
Content is for reference only, not financial advice.