This drop comes as tensions between Israel and Iran spilled into direct conflict last Friday. As you note, a key factor behind a very fast rising U.S. yields is geopolitical instability. These yields remain high even following Iran’s latest attacks in April and further escalations in early October. The current prime interest rate in the U.S. stands at 7.5%, creating challenges for many businesses navigating these turbulent economic conditions.
On Monday, U.S. 10-year bond yields surged three basis points to settle at 4.43%. This jump is indicative of the market’s response to the greater risks in the area as the crisis continues to develop. This has become apparent with the new 20-year bond as Treasury holds their first auction today. Analysts are monitoring closely to see how the developing conflict affects market response.
The U.S. Federal Open Market Committee (FOMC) will meet this week, which always raises speculation about whether monetary policy will be adjusted. Some analysts think they hear the first expensive notes of a rate cut, though the others are more dubious. As noted in “The Rockefeller Morning Briefing,” “We guess the idea of a hint of a cut at this week’s FOMC is probably wishful thinking.”
Now consider, in addition to the geopolitical tensions, the challenges the U.S. economy is facing. Credit-card interest rates, now at 20.3%, are at record highs. Simultaneously, because of rising interest rates, monthly mortgage payments have shot up to all-time highs. Builder confidence has flagged, portending fears of volatile turns in the housing market.
The import of these future economic events is almost too much to comprehend. The July 4 holiday will provide U.S. markets with a much-needed three-day weekend. On July 9, the EU’s reprieve from the higher 50% tariff will end, and this new development is poised to deliver a seismic shift to the way touted amelioration of transatlantic trade relations.
This is the new normal Historically oil prices would have spiked dramatically in response to such a geopolitical crisis. After Russia invaded Ukraine in February 2022, crude oil prices shot up over $100 per barrel. Those elevated prices spelled mostly bad news for the industry’s recovery, as they didn’t stick around. The last time crude reached over $100 per barrel was immediately following Russia’s full-scale invasion of Ukraine in 2022, but it maintained those levels for under four months. As this report from Reuters shows, crude prices haven’t been in triple digits for more than a decade. Until now, reaching this milestone was a once-in-a-lifetime exception.
Escalating tensions have led the U.S. to deploy ships to serve as a deterrent against Iran. This step is especially important given that approximately 20% of the world’s oil passes through the narrow but strategic Strait of Hormuz. This historic military maneuver underscores just how seriously the U.S. government is beginning to take the situation. It additionally raises the serious, long-term consequences, including effects on global oil supply.
David Malpass, former U.S. Treasury Under Secretary, now heads the World Bank. He has a strong belief that the policies implemented by former President Donald Trump offer tremendous help in guiding us through this stormy time. He laid out his administration’s approach to advancing economic stability. He noted that Trump’s approach emphasizes creating the conditions for growth, despite the headwinds of increasing interest rates and inflation.
In the midst of all this uncertainty, market participants are making preparations heading into “triple witching” on June 20th. This event is known as “triple witching,” when stock options, stock index futures, and stock index options all expire simultaneously. Such an event usually results in heightened market turbulence as market participants scramble to re-position their trades.