Fed Rate Hike Bets Revive Amid Escalating Iran War

The US Treasury yields have eased from 18-month highs as oil prices declined, but investors remain cautious ahead of the Federal Reserve's policy meeting next week.

The Fed funds futures traders are now pricing in a 36% chance of a rate hike at the conclusion of the Fed's two-day meeting on Wednesday, up sharply from 13% a week ago. This is despite the US and Iran reaching a deal last month aimed at ending the war, which had led to a decline in rate-hike bets.

The yield on benchmark U.S. 10-year notes fell 1.98 basis points to 4.683%. It is also on track for its largest weekly increase since May 11 with a gain of 14 basis points. The yield curve between 2- and 10-year yields steepened to 34.8 basis points.

The war in the Middle East has revived concerns over inflation, which could push the central bank toward higher rates. Fed Chairman Kevin Warsh's preference for less forward guidance is adding to the uncertainty surrounding the Fed's response to this new bout of higher energy costs.