FX.co ★ US 10-Year Yield Holds Near 2-Month Low

The yield on the 10-year US Treasury note fell below 4.38% on Monday, its lowest level since early May, as lower energy prices eased inflationary pressures and reduced the likelihood of a more hawkish stance by the Federal Reserve. Wholesale crude oil and fuel prices have extended their sharp decline from late June, amid signs that tanker traffic through the Strait of Hormuz is recovering. The resulting improvement in the supply of key energy commodities has helped offset the price pressures that led many FOMC members at this month’s meeting to project one or more rate hikes later this year.

Even before the recent drop in energy prices, core inflation measures had already indicated underlying inflation running above 3%, while labor market data continued to point to solid employment conditions. Nonetheless, long-term Treasury yields have not fallen as sharply as energy prices. Fed Chairman Warsh has repeatedly advocated for the central bank to reduce its holdings of Treasury notes and bonds, and has launched a task force to examine whether such a move is warranted.