Yields on shorter-dated U.S. Treasury notes were pinned at more than 17-month highs on Friday and on track to log their biggest weekly rise since early May, as investors priced a growing chance of an interest rate hike by the Federal Reserve as early as next week.
The yield on the 2-year Treasury note US2YT=RR dipped 3 basis points to 4.328%, while that on the 5-year note US5YT=RR slipped 2 basis points to 4.434%.
Both the notes hit their highest since early February 2025 on Thursday and have gained 15 and 16 basis points, respectively, this week.
Inflation and tariff worries add to pressure
The widening Middle East conflict that has now pulled in Iran-aligned Yemeni Houthis this week has sent oil prices towards $100 a barrel, adding to expectations that rising energy costs could feed into headline inflation in the coming months.
Adding to price pressure worries, the U.S. slapped new tariffs of 10% and 12.5% on goods from 60 trading partners, just as a temporary 10% global tariff expired. The administration cited Section 301 after the levies issued last year were deemed unconstitutional.
Global market reaction to the new duties was relatively contained, compared with the broad selloff in April last year, when President Donald Trump unveiled his initial raft of tariffs. However, Bas van Geffen, a senior macro strategist at Rabobank, said the implications were serious.
"Between these Section 301 investigations and the pending Section 232 investigations into the effects of imports on national security, the White House may be able to closely recreate the original tariffs. And this time, President Trump would probably have a more solid legal basis, making these tariffs more resilient to challenges in court," he said.
Curve flattens as traders price Fed tightening
The yield on the 10-year benchmark note US10YT=RR was hovering near an 18-month high of 4.683%, while that on the 30-year bond US30YT=RR traded at as much as 5.179% - the highest since 2007.
Yields on longer-dated bonds have risen at a smaller pace than their shorter-dated peers this week, reflecting what traders refer to as a "flattening" in the yield curve, leaving the gap between 2-year and 10-year curve yields US2US10=RR at 35.6 bps, down from over 36 bps last week.
Traders are attaching a roughly 30% chance to the Fed raising interest rates when it meets next week, and a 77.8% likelihood of a hike of 25 bps when it meets in September, LSEG-compiled data showed.
Private sector reports on business activity are due later in the day and could offer initial clues on how the underlying economy fared in early July.
The week also saw soft demand for a $21-billion sale of 10-year Treasury Inflation-Protected Securities and a separate $13-billion sale of 20-year bonds. The yield on the 10-year TIP US10YTIP=RR was at 2.42%.
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