- The sudden escalation of geopolitical tensions in the Middle East has triggered concerns over the global energy supply chain. Iran's attack on Kuwait's infrastructure and U.S. airstrikes near the Strait of Hormuz have driven U.S. crude oil futures up by 2.4% to $96 per barrel, while Brent crude rose to $97.77 per barrel, reigniting market expectations of structural inflation.
- The rise in energy premiums and intertwined risk aversion have placed significant selling pressure on the U.S. bond market. The yield on the benchmark 10-year Treasury note rose by 3.4 basis points in a single day to 4.489%, peaking at 4.499% during the session, marking the largest single-day increase in two weeks and reversing the previous downward trend due to expectations of geopolitical easing.
- U.S. domestic macroeconomic data has shown unexpected resilience, with 122,000 new private sector jobs added in May and the ISM Non-Manufacturing PMI rising to 54.5. Coupled with a significant 4.8% increase in factory orders in April, this further solidifies the rationale for a high-interest-rate environment. The pricing logic in the derivatives market has reversed from an expected 50 basis point rate cut at the beginning of the year to a current pricing of a potential 20 basis point rate hike within the year.
Escalating Geopolitical Conflicts Reshape Energy Premiums and Inflation Expectations
Recent diplomatic efforts in the Middle East have stalled, and the substantial expansion of conflicts has directly impacted core energy transport routes. With Iran's attack on Kuwait's airport facilities and U.S. airstrikes in the vicinity of the Strait of Hormuz, the risk of supply disruptions in the global oil market has surged. Against this backdrop, both U.S. crude oil futures and Brent crude oil futures have risen sharply. As a crucial hub for global oil and gas supply, the tense situation in the Strait of Hormuz has not only driven up spot energy prices but also transmitted through the supply chain to a wide range of goods and services. The volatility in energy prices has been reflected in the Federal Reserve's recent Beige Book, and if such external shocks become normalized, they will pose a substantial obstacle to the downward path of inflation.
Resilience of Macroeconomic Data Supports High-Interest-Rate Environment
Despite facing high borrowing costs, various high-frequency indicators of the U.S. real economy remain robust. According to the ADP National Employment Report, U.S. private sector jobs increased by 122,000 in May, surpassing the market expectation of 117,000. Meanwhile, the Non-Manufacturing Purchasing Managers' Index released by the Institute for Supply Management rose from 53.6 in April to 54.5, indicating that the momentum for expansion in the service sector remains strong. Additionally, factory orders in April surged by 4.8% month-on-month, marking a significant monthly increase since May 2025. A series of data indicates that terminal demand and the labor market have not shown clear signs of recession. If the official non-farm employment report further confirms the tightness of the labor market, the market's assessment of the long-term neutral interest rate may need to be further adjusted upward.
Structural Reassessment of Yield Curve and Market Pricing
The resonance of macroeconomic fundamentals and external shocks has prompted the fixed income market to rapidly adjust its pricing system. The yield on the two-year Treasury note, which is highly sensitive to interest rate expectations, rose by 2.9 basis points to close at 4.068%. Long-term bonds also faced pressure, with the 30-year Treasury yield climbing 2.3 basis points to 4.99%. Notably, the core indicator measuring the economic cycle, the yield spread between the two-year and 10-year Treasury notes, currently stands at a positive 40.7 basis points. According to the London Stock Exchange Group's data model, the derivatives market's expectations for the path of the federal funds rate have reversed from an expected 50 basis point rate cut within the year at the beginning of the year to a current pricing of a potential 20 basis point rate hike within the year.
Central Bank Stance and Marginal Changes in Inflation-Protected Bonds
In response to short-term inflation disturbances caused by geopolitical tensions, Federal Reserve officials have maintained policy stability in their public statements. New York Federal Reserve President Williams noted that the inflationary risks arising from Middle Eastern conflicts are not expected to be long-lasting, reiterating that there is no need to adjust U.S. monetary policy at this stage. From the performance of the inflation-protected bond market, the breakeven yield on five-year TIPS slightly rose to 2.537%, while the 10-year TIPS breakeven yield was reported at 2.394%, implying that the market expects the average annual inflation rate to remain around 2.4% over the next decade. This indicates that long-term inflation expectations remain relatively anchored, and if the core price index rebounds unexpectedly in the coming months, the long end of the yield curve may face a new round of reshaping.
