Oil Shock Reignites Rate Hike Fears! U.S. Long-Term Treasuries Break Key Support, Fed's Next Meeting in Focus

Middle East tensions remain elevated, and surging oil prices have triggered a fresh wave of selling in U.S. Treasury markets on Tuesday (21st), pushing yields sharply higher across the curve. Long-dated Treasuries broke through key technical levels closely watched by the market, underscoring that inflation concerns have once again become a focal point for traders.

Market data showed the 10-year Treasury yield briefly climbing to 4.64%, a near two-month high, breaching the closely watched 4.60% threshold before settling around 4.63%. The 30-year Treasury yield also rose in tandem, with the overall yield curve shifting upward by 2 to 5 basis points.

Meanwhile, the U.S. dollar gained broadly against major currencies.

Analysts point to Brent crude oil prices surpassing $91 per barrel as the immediate trigger for the sell-off. The military standoff between the U.S. and Iran has entered its tenth day, while Houthi threats to Red Sea shipping remain unresolved. Volatile energy prices have reignited market concerns over inflation prospects.

Signals from interest rate futures are also noteworthy. Traders currently assign about a 25% probability to a rate hike at the Federal Reserve's (Fed) upcoming meeting, down from earlier this month when odds were closer to 50-50. However, in recent trading sessions, rate hike expectations have quietly crept back up amid ongoing Middle East tensions.

Market participants note that this wave of selling has nearly erased all gains made last week following better-than-expected inflation data. The speed of this sentiment reversal is alarming and demands caution.

Izaac Brook,利率 strategist at RBC Capital Markets, analyzed that Tuesday's market movement primarily reflected the direct impact of rising energy prices.

He added that yield declines were further amplified as they hit key technical levels. The 2-year yield reclaimed above 4.20%, while the 10-year broke through 4.60%. Combined with thin summer trading volumes, these factors intensified market volatility.

From a market depth perspective, shrinking trading volumes have exacerbated this volatility. CME position data showed that Monday's volumes for SOFR (Secured Overnight Financing Rate) futures and options reached only 74% and 54% of their 20-day averages, respectively. Low liquidity makes prices more sensitive to sudden shocks, amplifying one-sided moves.

Notably, this decline in long-dated Treasuries isn't solely driven by rising inflation expectations—rising real yields are also a key driver.

The yield on 30-year Treasury Inflation-Protected Securities (TIPS), a proxy for real interest rates, climbed to 2.95% on Tuesday, marking its highest level since 2008.

Market analysis suggests that persistently high real yields reflect investor optimism about U.S. economic growth. At the same time, rising corporate borrowing costs, expanding government fiscal deficits, and surging capital demand fueled by the AI investment boom are collectively supporting elevated long-term rates.

This implies that even if inflation data softens temporarily in the future, long-term rates may struggle to decline easily.

On the Fed's policy outlook, market views remain divided. Christopher Hodge, Chief U.S. Economist at Natixis, emphasized that amid volatile oil prices, the Fed's decisions should rely more on actual published data rather than forecasts of the overall Consumer Price Index (CPI).

He also stressed that the Fed's policy response pattern under its new leadership remains highly uncertain.

Market observers interpret these remarks as highlighting the core contradiction facing markets: on one hand, inflationary pressures from oil shocks are real and ongoing; on the other, the Fed's policy stance under new leadership is unclear, making it difficult for investors to form stable expectations about future rate paths.

The Fed's policy meeting next week will serve as a crucial test of whether current market pricing is justified.