US Treasury yields traded with mixed direction on Monday as two-year yields retreated from a 15-month peak touched on Friday, a move that followed a labor market report that outperformed expectations.
The stronger employment data from Friday intensified market assumptions that the Federal Reserve may raise interest rates before the end of the year. Traders in fed funds futures markets are currently assigning a 68% probability to a rate increase by December, reflecting the recalibration driven by the jobs print.
Earlier concerns that weakening employment would limit the Fed's appetite for additional tightening had acted as a constraint on the outlook for further rate rises, even as inflation remained above the central bank's 2% annual target.
At the same time, oil prices have moved higher amid supply disruptions associated with the Iran war, a development that has heightened worries among market participants that inflationary pressures could take firmer hold in consumer prices.
Market commentary noted that analysts generally regard Fed rate hikes as unlikely unless inflation expectations pick up further and inflation becomes embedded in core consumer prices. That condition remains a key threshold for policymakers and markets monitoring the link between commodity-driven price moves and broader inflation readings.
Investors are now awaiting consumer price inflation figures due on Wednesday. Consensus projections point to a moderation in the monthly pace of core consumer prices in May to 0.3% from 0.4% in April. On an annual basis, core inflation is forecast to have inched up to 2.9% from 2.8% over the same interval.
With Treasury yields showing divergent moves, market participants will be watching both the CPI release and ongoing developments in oil markets closely, given their potential implications for inflation dynamics and the trajectory of monetary policy.