Treasury yields climb as fear grows that Fed rate cuts are off the table

Treasury yields rose on Friday as investor fears grow that rate cuts from the Federal Reserve may not take place after all, as the war in the Middle East drives inflation higher.

The 10-year Treasury yield — the benchmark for U.S. government borrowing — added 10 basis points to 4.38%. The 2-year note yield — which is more sensitive to short-term Fed rates decisions —traded at 3.932%, up 10 basis points as well.

One basis point equals 0.01%, or 1/100th of 1%, and yields and prices move inversely to one another.

The moves come after Iran and Israel exchanged strikes overnight, while Iran also launched new attacks against energy sites in the Gulf. As the war weighs heavily over markets, investors are now positioning for a slightly more hawkish stance from the Fed as higher global oil prices and renewed labor market uncertainty shape the economic backdrop.

Inflation was already trending above the Fed’s target even before energy costs spiked at the outbreak of the conflict on Feb. 28. The Fed’s rate-setting Federal Open Market Committee voted 11-1 on Wednesday to leave its key interest rate unchanged, a move widely anticipated by investors.

“The backdrop domestically is less friendly than it was a couple weeks ago too, because the Fed has kind of reversed course. The market has removed basically every rate cut from this year, and now is pricing odds of the hike,” Baird investment strategist Ross Mayfield said to CNBC.

Central banks in Europe also held rates steady on Thursday as policymakers grapple with the impact of the war, with markets now pricing in rate hikes this year.

Oil traded lower on Friday, with U.S. West Texas Intermediate prices sliding 1.2% to $94.99 a barrel, and Brent crude, the global benchmark, down 1.3% to $107.28.

The dip comes after Treasury Secretary Scott Bessent indicated that sanctions on Iranian crude stored aboard tankers could be lifted to help ease price pressures. Israeli Prime Minister Benjamin Netanyahu said his country was assisting the U.S. “in intel and other means” to try and reopen the Strait of Hormuz.