US Treasury yields fall as Hormuz progress eases inflation fears
- Two-year and ten-year yields fall as Oil prices tumble.
- Hormuz de-escalation hopes ease energy-driven inflation concerns.
- Core PCE and Warsh speech could reset Fed expectations.
US yields edge lower across the whole curve on Tuesday, following suit. Oil prices are pressured lower as positive developments in the Middle East seem to ease inflationary pressures, while market participants digest the implications of the US Treasury Department's decision to extend the bond buyback program to curb the US 30-year yield.
US yields decline as Oil drops and traders await Core PCE
Oil prices tumbled more than 3% on Tuesday after the US Treasury imposed sanctions on 60 entities linked to Iran on Monday.
However, recent developments in the Middle East include the Pakistan Army Chief Munir conveying an offer from the US to Iran that includes halting the blockade in the Strait of Hormuz in exchange for opening the Strait and stopping proxy attacks, Al Arabiya/Al Hadath sources report. Iran denied those claims, adding that Munir was seeking to open the space for further negotiations and to convey Iran’s conditions and positions to the US.
The White House announced the removal of mines in the Strait of Hormuz, which was confirmed by two US officials, as reported by Axios.
Aside from this, the US economic docket revealed that the jobs market remains solid, after the ADP Employment Change 4-week average improved sharply. At the same time, US Building Permits in July showed an improvement, while US households grew less confident regarding the financial and economic conditions in the country
Now eyes shift to the release of the Federal Reserve’s preferred inflation gauge, the Core Personal Consumption Expenditures (PCE) Price Index, on Wednesday. Alongside this, traders are looking for jobs and growth data, and the speech of the Fed Chair, Kevin Warsh.
The US 2-year T-note yield tumbles nearly five basis points at 4.193%, while the US 10-year benchmark note drops six basis points at 4.635%.
US 10-year Treasury note daily chart
Interest rates FAQs
Interest rates are charged by financial institutions on loans to borrowers and are paid as interest to savers and depositors. They are influenced by base lending rates, which are set by central banks in response to changes in the economy. Central banks normally have a mandate to ensure price stability, which in most cases means targeting a core inflation rate of around 2%. If inflation falls below target the central bank may cut base lending rates, with a view to stimulating lending and boosting the economy. If inflation rises substantially above 2% it normally results in the central bank raising base lending rates in an attempt to lower inflation.
Higher interest rates generally help strengthen a country’s currency as they make it a more attractive place for global investors to park their money.
Higher interest rates overall weigh on the price of Gold because they increase the opportunity cost of holding Gold instead of investing in an interest-bearing asset or placing cash in the bank. If interest rates are high that usually pushes up the price of the US Dollar (USD), and since Gold is priced in Dollars, this has the effect of lowering the price of Gold.
The Fed funds rate is the overnight rate at which US banks lend to each other. It is the oft-quoted headline rate set by the Federal Reserve at its FOMC meetings. It is set as a range, for example 4.75%-5.00%, though the upper limit (in that case 5.00%) is the quoted figure. Market expectations for future Fed funds rate are tracked by the CME FedWatch tool, which shapes how many financial markets behave in anticipation of future Federal Reserve monetary policy decisions.
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