Oil Supply Shock Drives Two-Year Treasury Yield Above 3.85%
Treasury yields climbed to multi-week highs as oil prices jumped 2–4% on Middle East supply disruptions, pushing the two-year note above 3.85% and the five-year CPI swap rate to 2.7%. Market pricing now shows only a 20% chance of a Fed rate cut this year.
1. Treasury Yields Surge
Treasury yields across maturities climbed, with the two-year note topping 3.85% for the first time since April 7 as oil prices jumped 2–4% on Middle East supply disruptions.
2. Inflation Expectations Climb
The five-year swap rate tied to the consumer price index rose above 2.7% for the first time since August 2025, signalling elevated market-implied inflation expectations.
3. Fed Rate Cut Odds Slashed
Market pricing now reflects roughly a 20% chance of a quarter-point Federal Reserve rate cut this year, down from expectations of two cuts at the start of the year.
4. BMO Capital Markets' Outlook
BMO Capital Markets highlights that rising energy costs are setting the direction for US interest-rate trends and creating a modestly bearish tone in the Treasury market despite subdued price action.