US Treasury yields ended higher on Monday, though they retreated from session highs, as investors weighed conflicting signals surrounding diplomatic efforts between the United States and Iran while also assessing stronger-than-expected U.S. economic data.
According to Reuters, Treasury yields initially rose after Iran's Tasnim news agency reported that Tehran's negotiating team had suspended indirect communications with the United States through mediators following attacks on Lebanon. The report raised concerns that efforts to resolve the three-month-long conflict could face further setbacks, prompting a sharp rise in oil prices.
However, yields later eased after U.S. President Donald Trump stated on Truth Social that discussions with Iran remained ongoing, contradicting the earlier report. Trump also said he had communicated through intermediaries with the Iran-backed Lebanese group Hezbollah and obtained assurances that it would refrain from attacking Israel.
The geopolitical developments pushed energy prices sharply higher.
The benchmark 10-year U.S. Treasury yield rose 2 basis points to 4.473%, after touching an intraday high of 4.518%. Market participants had become increasingly optimistic in recent sessions that a diplomatic breakthrough between Washington and Tehran could be achieved, helping drive oil prices to their lowest levels since mid-April. Monday's developments challenged that expectation and reignited concerns over energy-driven inflation.
The yield on the 30-year Treasury bond slipped marginally to 4.989% after earlier reaching 5.028%.
Treasury yields also received support from stronger-than-expected economic indicators. Data from the Institute for Supply Management showed that the U.S. manufacturing Purchasing Managers Index (PMI) rose to 54.0 in May, the highest reading since May 2022. The figure exceeded economists' expectations of 53.0 and improved from 52.7 in April, according to Reuters.
Separately, the Commerce Department reported that construction spending increased 0.4% in April, surpassing forecasts for a 0.2% gain. March's increase was revised down to 0.2%.
Despite the positive economic readings, market attention remained firmly focused on geopolitical developments and their implications for inflation and monetary policy.
The spread between two-year and 10-year Treasury yields, a closely watched gauge of economic expectations, stood at a positive 42 basis points.
The two-year Treasury yield, which is particularly sensitive to Federal Reserve policy expectations, rose 3.7 basis points to 4.051% after reaching 4.09%, its highest level since May 22.
Persistent strength in crude oil prices, compounded by the closure of the Strait of Hormuz, has prompted investors to reassess the outlook for U.S. interest rates. According to CME FedWatch data cited by Reuters, markets are now pricing in a 53.4% probability of at least one 25-basis-point Federal Reserve rate increase by December, up from roughly 45% in the previous session. At the start of the year, investors had anticipated around two rate cuts during 2026.
Inflation expectations also edged higher. The five-year Treasury Inflation-Protected Securities (TIPS) breakeven rate rose to 2.55% from 2.53% on Friday. Meanwhile, the 10-year TIPS breakeven rate stood at 2.413%, suggesting investors expect inflation to average approximately 2.4% annually over the next decade, Reuters reported.
The combination of elevated energy prices, resilient economic activity and uncertainty surrounding Middle East diplomacy continues to shape investor expectations for inflation and the future path of Federal Reserve policy.
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