US Treasuries
- The 10-year Treasury yield is currently 4.37%, lower by 13 basis points since last Monday morning. 10-year bonds traded in a 15 basis point range (4.36% - 4.51%) this past week.
- 2-year Treasuries are at 4.10% this morning, 14 basis points higher than last week.
Trading Recap – There was a renewed exchange of military strikes between the US and Iran (Fri–Sun), reintroducing some uncertainty around the crude oil shipments through the Strait of Hormuz. However, as present, there appears to be an agreement to stop the hostilities and resume the talks. As of this morning, the memorandum of understanding (MOU) is in place and there was only a muted reaction in the crude oil and bond market.
10-year yields traded in a narrow range around 4.48% early last week until Wednesday morning, when they gapped 8 bps lower after the May PCE inflation print reflected modestly cooling inflation, and thus reduced the expectation of the Fed raising rates over the near term. With crude oil shipments moving through the Strait of Hormuz and WTI crude oil prices dropping below 70 (the first time since before the Iran war), 10-year yields continued to improve to 4.38% as of this morning.
Last Week’s Economic Data (Selected Highlights)
As discussed above, the markets took the PCE inflation data as constructive even though the headline YoY PCE printed at 4.1%, the highest in three years. However, with the falling crude oil prices and the MOU to end the Iran war signed, May’s inflation prints are likely to be the peak for 2026.
- PCE Price Index (May) – The headline PCE inflation index printed at +0.4% for the month, the same as April. Year-over-year, PCE headline inflation is at +4.1% (versus 3.8% for April). Core PCE inflation without food and energy prices printed at +0.3% for the month (same as revised print in April) and at 3.4% year-over-year.
- Gross Domestic Product 2026 Q1 3rd read – GDP in the 1st quarter expanded at 2.1%, versus 0.5% in the 4th quarter of 2025.
- Weekly Initial Jobless Claims: For the week ending June 20th, unemployment claims printed at 215k, lower by 12k versus the previous week at 227k, as revised. The 4-week moving average shows 224.25k, a low level that is consistent with a solid labor market.
- University of Michigan Consumer Sentiment (May final): UMich consumer sentiment rebounded to 49.5 after May’s very low 44.8. The UMich survey also shows that consumers’ inflation expectations are 4.6% over the next year (same as previously) and 3.3% over the next 5-10 years, versus 3.4% previously.
Fed Monetary Policy
In light of May’s inflation data (likely marking the peak for 2026), the Federal Reserve needed to shift away from any easing bias and refocus on combating inflation. During his press conference 10 days ago, Chairman Warsh effectively emphasized that price stability remains the Fed’s top priority. He also underscored the institution’s independence, while buying the Fed time to assess incoming data before deciding whether to raise interest rates.
The next FOMC meeting is scheduled for July 28–29, with June CPI and PPI to be released on July 14 and July 15, respectively. Given the roughly 30% decline in crude oil prices over recent weeks, June inflation data could come in very soft—potentially even showing a negative month-over-month print. A Fed rate hike at the meeting at the end of July would indicate the belief that inflation will continue into the 3rd and 4th quarter; I just don’t see it. A constructive backdrop for rates would be continued downside surprises in inflation data. At this point, my base case is that the Fed remains on hold.
Fed funds rate is currently 3.63%, (3.50%-3.75% range). As implied by the shape of the yield curve, investors expect a 0.316% rate increase on or before the Fed meeting on December 9 and no further rate increases in 2027.
My Take on Longer Term Yields
The recent move in bond yields below 4.40% reflects growing confidence that inflation may have peaked, alongside moderating geopolitical risk. The de-escalation of the Iran conflict has helped normalize crude oil prices, removing a key upside risk to near-term inflation.
However, the relationship between crude oil and Treasury yields has been spotty in recent weeks. Falling oil has contributed to lower yields, but not as much as I would have expected. Investor concerns about the stickiness in core inflation and the Fed policy outlook remain key drivers.
With inflation data likely to improve from here (supported in part by stable to lower energy prices), I expect 10-year Treasury yields to continue trending lower, approaching ~4.25% in the near term.
This Coming Week’s Economic Data
“Jobs Week” with JOLTS (job openings) on Tuesday, ADP jobs report on Wednesday, weekly unemployment claims, and June’s US employment report (and unemployment rate on Thursday). Markets will be closed on Friday 7/3. The Wall Street consensus estimate for June non-farm payroll job gains is about +115k; that’s after job gains of +188k the previous three months. The unemployment rate is expected to remain at 4.3%.
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