Treasury Yields Hold Steady as U.S.-Iran Escalation Clouds Fed Outlook; Oil Climbs, Gold Falls...

U.S. Treasury yields were little changed on Monday as investors weighed renewed military escalation between the United States and Iran against a packed week of economic data that could reshape expectations for Federal Reserve policy.

The benchmark 10-year Treasury yield was broadly unchanged at 4.473%, while the two-year yield, which is more sensitive to monetary policy expectations, rose just over one basis point to 4.223%. The 30-year Treasury bond yield was little changed at 5.071%.

The muted move in the bond market masked a sharp shift in global risk sentiment after the fragile ceasefire between Washington and Tehran came under increasing strain over the weekend, reigniting concerns over energy supplies, inflation and the trajectory of U.S. interest rates.

The latest market jitters followed a fresh round of military exchanges after an Iranian strike on a commercial vessel prompted retaliatory U.S. airstrikes. Iran responded by launching missile and drone attacks on U.S. military facilities across Kuwait, Bahrain, Jordan, Oman and Qatar, according to Iranian state media, significantly expanding the geographical scope of the conflict.

The confrontation has also reignited tensions over the Strait of Hormuz, one of the world's most important energy corridors through which roughly one-fifth of global oil shipments normally pass.

The latest hostilities have cast fresh doubt over the interim peace agreement signed last month that was intended to reopen the waterway permanently and provide a 60-day framework for negotiating an end to the war. Instead, the renewed fighting has revived fears of prolonged supply disruptions in global energy markets.

Oil Extends Rally As Supply Risks Grow

Oil prices climbed sharply as traders priced in the increasing possibility of further disruptions to crude exports from the Gulf. Brent crude futures rose about 3% to around $78.50 per barrel, while West Texas Intermediate (WTI) advanced more than 2.5% to roughly $73.25.

The gains add to the broader surge in oil prices following President Donald Trump's declaration last week that the interim agreement with Iran was "over." Since then, escalating military action and uncertainty surrounding shipping through the Strait of Hormuz have reinforced expectations that energy markets could remain tight for an extended period.

For financial markets, higher oil prices represent a dual challenge. While they support energy producers, they also increase transportation and manufacturing costs, raising the likelihood that inflation remains elevated for longer.

The prospect of persistently higher energy prices has led investors to reassess the Federal Reserve's policy path.

Markets are now pricing a roughly 71% probability of a September interest-rate increase, up from approximately 63% a week earlier, according to CME's FedWatch Tool.

Higher oil prices complicate the Fed's inflation fight because energy costs eventually feed into transportation, food, manufacturing, and consumer prices. That dynamic has reinforced expectations that policymakers may need to keep borrowing costs elevated for longer than previously anticipated.

This week's economic calendar is therefore expected to carry added significance.

Investors will closely monitor:

• June Consumer Price Index (CPI) data on Tuesday.
• Producer Price Index (PPI) figures on Wednesday.
• Retail sales data.
• Weekly jobless claims.
• July consumer sentiment data on Friday.

Markets will also focus on Federal Reserve Chair Kevin Warsh's first congressional testimony on Tuesday and Wednesday for signals on inflation, economic growth, and the future path of monetary policy.

Alex Guiliano, Chief Investment Officer at Resonate Wealth Partners, said investors are trying to determine whether the U.S. consumer remains resilient.

"The real question is whether these reports will validate the strong spending narrative, or if mounting geopolitical risks and elevated interest rates have had a more significant impact on the consumer over the last few months," he said.

Gold Weakens As Yields And Rate Expectations Rise

Gold prices fell for a second consecutive session as higher Treasury yields and expectations of tighter monetary policy outweighed the metal's traditional safe-haven appeal. Spot gold declined 1.2% to $4,072.49 per ounce, while August U.S. gold futures fell 0.8% to $4,081.30.

Ordinarily, geopolitical crises support demand for bullion. However, analysts said inflation concerns and rising bond yields have become the dominant drivers of the precious metals market.

Ole Hansen, commodity strategist at Saxo Bank, said higher oil prices have strengthened expectations that the Federal Reserve may need to tighten policy further.

"Renewed hostilities in the Gulf rekindle concerns about inflation and the risk of further Federal Reserve tightening, creating additional headwinds through higher bond yields and a stronger dollar," he said.

He added that ongoing tensions in the Middle East could produce sharp swings in bullion prices.

"Focus on the Middle East and higher oil prices combined with low liquidity during the summer holiday period are key risks that may drive gold prices outside their current consolidation range of $3,900-$4,200."

Higher interest rates reduce the appeal of gold because the metal generates no income, increasing its opportunity cost relative to interest-bearing assets such as government bonds.

Investor positioning also softened.

Data released on Friday showed COMEX gold speculators reduced their net long positions by 1,964 contracts to 114,854 during the week ended July 7, reversing part of the optimism that had built over the previous three weeks.

Other precious metals also retreated.

Spot silver fell 1.6%, platinum slipped 0.3%, while palladium declined 0.7%.

Dollar Surrenders Early Gains

The U.S. dollar initially strengthened as investors sought traditional safe-haven assets following the latest military escalation.

However, those gains faded later in the session.

The Dollar Index, which measures the U.S. currency against six major peers, rose as much as 0.3% before reversing to trade 0.2% lower at 100.83.

The euro rose 0.15% to $1.1433, while sterling traded little changed near $1.339. The Australian dollar edged 0.1% lower to $0.694.

Thomas Mathews, Head of Markets for Asia Pacific at Capital Economics, said the dollar may not benefit from geopolitical tensions to the same extent as earlier in the conflict.

"The dollar was obviously the big winner from the war last time," he said.

However, he noted that circumstances have changed.

"It's not clear to me the greenback would gain as much this time if the situation continued to worsen."

Markets have already substantially repriced expectations for Federal Reserve policy, limiting the scope for another sharp appreciation in the U.S. currency.

Yen Retreats After Pension Report

The Japanese yen weakened after Reuters reported that Tokyo has no immediate plans to alter the investment allocations of its massive state pension funds.

The dollar rose 0.2% to around 162.05 yen, pushing the Japanese currency back toward levels that have previously prompted official intervention.

The move partially reversed Friday's rally, which followed comments from Finance Minister Satsuki Katayama indicating the government wanted pension funds, including the Government Pension Investment Fund (GPIF), to increase investments in domestic financial assets.

Reuters reported that while policymakers are exploring ways to encourage greater domestic investment, no immediate changes to GPIF's strategic asset allocation are planned.

Chris Turner, Head of Global Markets at ING, said currency intervention remains a possibility but warned it is unlikely to reverse the yen's broader weakness without changes in underlying economic conditions.

"Intervention alone cannot reverse the current bull trend," he said. "For that to happen, energy prices need to come lower and the Fed must conclude that it does not need to hike rates after all."