Short-end US yields hit 17-month high as oil surge fuels rate-hike bets

SINGAPORE - Short-end US Treasury yields rose to a 17-month high on Tuesday as renewed US-Iran hostilities drove oil prices higher and brought interest rate-hike expectations back into focus ahead of a crucial inflation report due later in the day.

The latest escalation of the conflict in the Middle East, where the US military carried out a third consecutive night of strikes against Iran and two tankers came under fire in the critical Strait of Hormuz, sent oil prices to a one month-high.

That has stoked inflationary worries as traders anticipate the US Federal Reserve will hike rates this year. Traders are fully pricing in a hike by September, with the probability of a move in July has risen to 43.3% from 25.7% a week ago, according to the CME FedWatch tool.

The two-year US Treasury yield, which typically moves in step with interest rate expectations for the Fed, rose 2 basis points to 4.283%, its highest since February 2025.

The yield on the benchmark US 10-year Treasury note hit a two-month high and was last at 4.619%.

Yields also got a lift on Monday after Federal Reserve Governor Christopher Waller said the US central bank may need to raise interest rates "in the near term" if upcoming data show inflation continuing to run well above its 2% target.

His comments set the stage for the US inflation report due later on Tuesday.

"We expect June US CPI to show some relief from lower energy prices, although core inflation is likely to remain sticky," said OCBC strategists.

Investor focus will also be on comments from Federal Reserve Chairman Kevin Warsh as he heads to Capitol Hill on Tuesday to deliver his first congressional testimony since taking over as head of the US central bank.

(Reporting by Ankur Banerjee in Singapore; Editing by Sherry Jacob-Phillips)