The escalation of the situation in the Middle East adds inflationary pressure, leading to increased expectations for Federal Reserve interest rate hikes. The yield on 10-year U.S. Treasury bonds has surpassed 4.75%, hitting a new 52-week high.

On Monday, the U.S. Treasury market experienced a sell-off, with the 10-year Treasury yield rising to 4.76%, surpassing 4.75% and reaching a new 52-week high. The escalation of military tensions in the Middle East has reignited concerns over potential disruptions to energy transportation through the Strait of Hormuz, leading to an increase in international oil prices, which amplifies inflationary pressures in the U.S. and strengthens market expectations for a rate hike by the Federal Reserve in September. The rise in Treasury yields is being driven by geopolitical risks, rising energy prices, and tightening monetary policy expectations. Just last week, Federal Reserve Chairman Waller signaled a hawkish stance at the Jackson Hole meeting, while the new developments in the Middle East heighten the possibility of rising energy prices further pushing inflation. On Monday, the 10-year U.S. Treasury yield peaked at 4.76%, setting a new 52-week high. In contrast, the yield had previously broken 4.75% in January 2025, briefly reaching around 4.8%, before retreating. Prior to that, the yield had surged to approximately 5% in October 2023, marking a post-pandemic high. As bond prices and yields move inversely, a rapid increase in yields signifies that investors are selling U.S. Treasuries. This round of Treasury sell-offs coincides with a sudden surge in geopolitical risks in the Middle East. The U.S. military attacked two Iranian rocket launch facilities on Larak Island near the Strait of Hormuz, marking the first known U.S. strike on targets within Iran since late July. This incident has rekindled market concerns that if military conflict between the U.S. and Iran escalates further, one of the world's most vital energy transportation routes, the Strait of Hormuz, could be impacted. The energy market reacted swiftly to the geopolitical risks. At the time of reporting, U.S. crude oil and Brent crude futures were both up about 3%. The market fears that if military conflict near the Strait of Hormuz escalates, crude oil supply and transportation could be disrupted, driving up global energy prices. For the U.S. bond market, rising oil prices signify new inflation risks. Just last week, Federal Reserve Chairman Waller emphasized at the Jackson Hole global central bank conference that price pressures in the U.S. have not shown sufficient signs of easing, and the Federal Reserve must have full confidence that potential inflation is clearly and rapidly moving towards the 2% target; otherwise, further action is still needed. Thus, the new risks to energy supply make investors more apprehensive that rising oil prices could re-accelerate overall inflation, forcing the Federal Reserve to maintain a tighter monetary policy. This forms a clearer market transmission logic: as the situation in the Middle East escalates, worries about disruptions to oil supply heat up, driving international oil prices higher and further intensifying inflation pressures in the U.S. Against this backdrop, investor expectations for further rate hikes by the Federal Reserve have increased, ultimately pushing U.S. Treasury yields higher. At the same time, shorter-term Treasury yields, which are more sensitive to Federal Reserve policy, remain elevated. The 2-year U.S. Treasury yield is currently trading around 4.35%. Compared to the significant rise in the 10-year yield driven by geopolitical and inflation risks, the overall change in the 2-year yield has been relatively limited, but it is still supported by expectations of Fed rate hikes. Following Waller's speech at Jackson Hole last Friday, market expectations for a September rate hike have notably intensified. According to the CME FedWatch tool, the market currently estimates the probability of a Fed rate hike in September at 63.9%, indicating that a rate hike has become the baseline scenario priced in by the market. This change is particularly pronounced compared to before Waller's speech. Previously, there was considerable disagreement in the market regarding whether the Fed needed to tighten policy further, but after Waller emphasized inflation risks and that the current financial environment is not restrictive, traders quickly boosted their bets on a September rate hike. Trent Carroll, founder of TA Capital Research, points out that the 2-year Treasury yield is currently in a noteworthy technical position. Over the past few years, around 4.35% has repeatedly served as a technical resistance level for the 2-year yield. The yield is now trading just below this level. Carroll believes that if the 2-year yield breaks above 4.4%, it may signal that the market is pricing in a potential shift in Federal Reserve policy, especially in the context of increasingly stronger rate hike expectations. Since the 2-year Treasury yield is typically the most sensitive to federal funds rate expectations, whether this yield can break above 4.4% may also serve as an important indicator for observing whether the market is further reinforcing expectations for Fed tightening.