Short-term U.S. Treasury yields moved lower on Friday as oil prices weakened after a rise in crude shipments through the Strait of Hormuz. The volume of oil transiting the strait reached its highest point since the start of the U.S.-Israeli war against Iran, a development market participants linked to easing near-term pressure on prices.
Traders and analysts interpreted the larger flow of oil as a possible sign that recent drivers of inflation could begin to ease, especially if the referenced peace agreement takes effect. The article notes, however, that inflation remains above the Federal Reserve's 2% annual objective.
Market attention has also remained fixed on the Federal Reserve's policy trajectory. In the June meeting dot plot, nine of the 18 policymakers who submitted projections indicated they expect at least one rate increase in 2026. That split among policymakers has left open the possibility of further tightening over the medium term.
Fed Chair Kevin Warsh did not provide a rate outlook, consistent with his stated preference for offering less forward guidance. The absence of explicit forward guidance from the chair left traders to price policy moves based on the dot plot and other signals.
Fed funds futures currently imply a 63% probability of a rate increase by September. That probability reflects market judgment about the near-term path for policy and helps explain why the two-year Treasury - a security that typically moves closely with expectations for the Federal Reserve's policy rate - reacted to developments in both oil flows and Fed communications.
The two-year Treasury note yield fell 2.68 basis points to 4.094%, a decline that brought the yield to its lowest level since June 17. The move highlights the sensitivity of short-term yields to shifts in both inflation expectations and perceived policy risk.
Bottom line: Increased crude shipments through the Strait of Hormuz coincided with lower oil prices and a decline in short-term Treasury yields, while markets continue to assess the balance between persistent inflation above target and mixed signals from Fed policymakers.