Longer-Dated Yields Lower After Data, on Track for Weekly Decline

Longer-dated U.S. Treasury yields eased Friday, putting the benchmark 10-year and 30-year notes on track for a weekly decline as traders balanced encouraging domestic economic data against renewed hostilities in the Middle East.

The Numbers

The 10-year Treasury yield finished at 4.55%, while the 2-year note ended at 4.18%, according to the latest weekly snapshot. Earlier in the week, the 2-year Treasury yield shed 3 basis points to reach 4.122%, while the 30-year Treasury yield — which tends to track broader geopolitical events more closely than shorter maturities — fell more than 3 basis points to 5.063%. That marks a retreat from the near two-month high of 5.62% touched July 13, when the 10-year yield had spiked amid renewed Middle East tensions before falling back to around 4.52% as softer inflation data took hold.

What's Driving the Decline

The pullback in borrowing costs follows a string of cooler-than-expected inflation readings this week. Both consumer and producer price data for June came in softer than forecast, while inflation expectations measured by the University of Michigan consumer survey dropped for a second consecutive month — a signal that the earlier pullback in wholesale fuel costs is beginning to filter through the broader economy. U.S. jobless claims for the week ending July 11 also came in better than expected, at a seasonally adjusted 208,000, reinforcing the picture of a labor market that remains stable even as inflation cools.

A Volatile Week for Rate Expectations

The week's data had an outsized impact on Fed rate-hike expectations. Following Tuesday's cooler CPI report — which showed prices fell 0.4% in June, a larger decline than economists anticipated, bringing the annual rate to 3.5% versus a forecast 3.8% — traders slashed the odds of a July Fed rate increase to just 17%, down sharply from 42% just a day earlier, according to CME's FedWatch tool. Odds of a hike at the Fed's September meeting remained elevated at nearly 60%, reflecting continued underlying concern about inflation even as the most recent monthly data trended favorably.

Geopolitics Still a Wildcard

Even as domestic data pushed yields lower, the ongoing conflict between the U.S. and Iran continued to inject uncertainty into fixed income markets. Traders have continued closely monitoring escalating tensions in the Gulf throughout the week, with the 30-year yield's tendency to track geopolitical risk keeping it comparatively "stickier" than shorter-dated maturities even as the broader yield curve eased. Separately, fresh geopolitical uncertainty emerged this week after President Trump alleged China had compromised the 2020 U.S. presidential election, a claim that added another layer of risk to an already complex backdrop, even as investors continued to lean into safer fixed-income assets amid the broader decline in risk sentiment.

The Bigger Picture: A Still-Elevated Yield Curve

Despite the week's pullback, the Treasury curve remains upward-sloping and elevated by recent historical standards. As of Thursday's close, the 3-month bill yielded 3.79%, climbing to 3.98% for the 1-year, 4.16% for the 2-year, 4.28% for the 5-year, 4.57% for the 10-year, and 5.09% for the 30-year. The 10-year vs. 3-month spread stood at +78 basis points and the 10-year vs. 2-year spread at +41 basis points — both positive readings consistent with a cautious growth outlook and persistent inflation concerns, suggesting the Fed is likely to hold policy steady at its upcoming July 28-29 meeting rather than move in either direction.

What It Means for Borrowers

The retreat in longer-dated yields has modest implications for consumers as well: mortgage rates, which tend to track the 10-year yield, have continued drifting lower in recent weeks, with Freddie Mac's most recent weekly Primary Mortgage Market Survey showing the 30-year fixed rate near 6.4%–6.5%. Still, elevated term premia and steady Treasury issuance continue to support higher yields at the long end of the curve overall, reinforcing a broader "higher for longer" backdrop even amid this week's short-term relief.

What's Next

With the Fed's next policy meeting scheduled for July 28-29, markets will be watching closely for any further inflation data, additional Fed commentary, and developments in the U.S.-Iran conflict — all of which are likely to continue driving volatility in both directions across the Treasury curve in the days ahead.