Escalating tensions tied to the Iran conflict have pushed crude prices toward the $90 to $97 per barrel range, and investors are now betting that the Fed may need to raise interest rates at its upcoming policy meeting.
Treasury yields surge as rate cut dreams evaporate
The bond market is already pricing in the pain. US 2-year Treasury yields climbed to 4.37% on July 23, their highest level since early 2025. The 10-year benchmark wasn’t far behind, reaching a year-to-date high of approximately 4.7%.
The 2-year yield is particularly telling because it tends to track near-term Fed policy expectations. Market-implied odds for a Fed rate hike have increased significantly in the wake of the oil shock. This represents a complete reversal from the consensus view that had prevailed for months, where multiple rate cuts were expected before year-end.
The Fed’s preferred inflation gauge, the PCE index, was already projected to rise to 2.7% back in March when a prior oil surge hit markets. With crude now flirting with triple digits, those projections could look optimistic.
