The Federal Reserve is facing a complex situation, which might lead to keeping rates on hold at the next FOMC meeting.
With events quickly escalating in the Middle East and the recent bond selloff pushing long-term yields to new multi-decade highs, policymakers will be reluctant to hike.
Yet, the central bank might need to keep a hawkish bias as the conflict in Israel could drive higher commodity prices, particularly oil.
That will translate in the front part of the yield curve remaining anchored, while long-term Treasuries might initially gain from safe-haven demand. However, they will still need to navigate through 10-year and 30-year auctions this week, which might provide support against declining yields.
It’s important to note that for 10-year US Treasury yields to enter a bearish trend, they will need to break below 4.05%. As yields closed at 4.8% last week, we consider that unlikely, especially as the federal deficit is swelling and inflation remains a concern.
Cash bond trading is closed today due to bank holidays in Japan and the United States. However, bond futures can suggest where long-term yields might be headed this week once the US bond market opens on Tuesday. As the 3-month SOFR rate still sees rates not dropping below 4%, it's safe to expect 10-year US Treasury yields to remain above 4.5%.