U.S. Treasury yields rose on Tuesday while oil prices extended their sharp rally and gold recovered modestly, as investors positioned for a potentially more hawkish Federal Reserve amid escalating geopolitical tensions in the Middle East.
President Donald Trump’s proposal to impose shipping fees on vessels transiting the Strait of Hormuz and reinstate a blockade of Iranian ports has reignited concerns about energy-driven inflation, prompting markets to reassess the outlook for U.S. monetary policy.
The developments come at a pivotal moment for financial markets, with investors awaiting June inflation data and Federal Reserve Chair Kevin Warsh’s first congressional testimony since taking office. Together, the events could shape expectations for the Fed’s policy path through the remainder of 2026.
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U.S. Treasury yields moved higher across the curve in early trading, extending Monday’s selloff in government bonds as investors priced in a greater probability that persistent inflation could force the Fed to tighten policy further.
The benchmark 10-year Treasury yield rose more than one basis point to 4.63%, while the policy-sensitive two-year yield climbed above 4.29%. The 30-year Treasury yield also advanced to around 5.11%.
The move follows a sharp repricing on Monday, when the two-year yield surged more than six basis points, and the 10-year yield gained four basis points after Trump unveiled plans to impose a 20% shipping fee on cargo passing through the Strait of Hormuz and ordered the reinstatement of a U.S. blockade of Iranian ports.
The measures represent one of the most significant escalations in U.S. economic pressure on Iran since the conflict began earlier this year and have amplified fears of prolonged disruptions to global energy markets.
Crude prices continued climbing after Monday’s surge, escalating concerns that higher energy costs could reignite inflation just as price pressures were beginning to moderate.
U.S. West Texas Intermediate crude rose nearly 3% to around $80.35 per barrel, while Brent crude climbed close to 4% to approximately $86.50, building on Monday’s gains of almost 10%.
The Strait of Hormuz remains the world’s most important oil transit chokepoint. Before the outbreak of the U.S.-Iran conflict in late February, roughly one-fifth of global crude supplies passed through the waterway. Shipping volumes subsequently fell after Iran began targeting commercial vessels, although traffic had shown signs of recovering following an interim agreement between Washington and Tehran.
Trump’s latest announcement has renewed fears that supply disruptions could persist for an extended period.
Citigroup warned that the proposed shipping fees materially increase the risk of further military escalation and could delay any meaningful diplomatic breakthrough with Tehran.
“The possibility that the Iranian regime walks away from the memorandum of understanding until after the U.S. midterm elections has also risen, a scenario which would most likely see higher-for-longer oil prices,” the bank said.
Markets Shift Toward Additional Fed Tightening
The renewed inflation threat is rapidly changing interest rate expectations. According to CME FedWatch data, traders now assign roughly a 42% probability of a rate increase at the Federal Reserve’s July meeting, up sharply from about 27% a week earlier. Markets are also increasingly pricing in another rate increase by next April.
Fed Governor Christopher Waller reinforced the hawkish narrative on Monday, saying policymakers may need to raise interest rates “in the near term” if incoming data continue showing inflation remaining well above the central bank’s 2% target. Markets are now pricing approximately a 75% probability of a September rate hike, illustrating how quickly expectations have shifted following the latest energy shock.
The changing outlook reflects growing concern that rising oil prices could spill over into transportation, manufacturing, and consumer goods, delaying progress toward the Fed’s inflation objective.
Investor attention now turns to two critical catalysts. The Labor Department is expected to report that annual consumer inflation eased to 3.8% in June from 4.2% in May, although core inflation, which excludes food and energy, is forecast to remain unchanged at 2.9%.
Markets will closely scrutinize whether the recent surge in energy prices has begun filtering into broader inflation measures or whether underlying price pressures continue to moderate.
Equally important will be Federal Reserve Chair Kevin Warsh’s first semiannual testimony before Congress. Warsh is scheduled to appear before the House Financial Services Committee on Tuesday and the Senate Banking Committee on Wednesday.
His testimony is expected to provide the clearest indication yet of how the new Fed leadership intends to respond to mounting geopolitical risks and renewed inflationary pressures. Any suggestion that policymakers are becoming more concerned about energy-driven inflation could further strengthen expectations for additional interest rate increases.
Gold Attempts to Stabilize
Gold edged higher after suffering its steepest one-day decline in more than a month.
Spot gold rose about 0.5% to roughly $4,020 an ounce after earlier falling to a two-week low, while U.S. gold futures posted similar gains. The rebound was helped by a modest pullback in the U.S. dollar, with the Dollar Index easing about 0.2%, making bullion more affordable for holders of other currencies.
However, analysts cautioned that gold’s recovery could prove short-lived if inflation surprises to the upside.
“A CPI reading above the region of 3.8% could reinforce expectations of a hawkish Federal Reserve and create a headwind for gold prices,” said Ricardo Evangelista, senior analyst at ActivTrades.
Unlike interest-bearing assets, gold generates no yield, making it less attractive when investors anticipate higher interest rates.
Monday’s nearly 3% decline illustrated how quickly inflation expectations can outweigh gold’s traditional role as a geopolitical safe haven. Normally, escalating geopolitical tensions boost demand for bullion, but when those tensions simultaneously fuel expectations of tighter monetary policy and higher real interest rates, gold can come under pressure.