Interest Futures
Fundamental Analysis

Interest Futures Plunge as Middle East Tensions Propel Treasury Yields

  • An escalation in Middle East tensions caused some panic in the market.
  • The Fed’s Williams said he does not see any need to cut interest rates now.
  • US unemployment claims held steady at a low level last week.

Interest futures fell on Thursday as Treasury yields soared due to the rising tensions in the Middle East. Furthermore, economic data from the US and policymaker remarks pointed to a delay in Fed rate cuts.

Investors were on the edge while waiting for Middle East war developments. The uncertainty in the market rose after Iran attacked Israel, leading to questions on whether Israel would retaliate and escalate the war. As a result, Treasury yields rallied as investors scrambled for safety. 

Moreover, reports early on Friday revealed that Israel attacked Iran, causing some panic in the market. The war between Israel and Hamas has escalated to include Iran. If more allies of the two parties get involved, there are fears that the war could erupt into something much bigger. This, in turn, would have a significant impact on commodity prices and inflation around the globe. 

Geopolitical tensions can make bonds more attractive than equities. However, when yields are also rising, there is downward pressure on bond prices, leading to a decline in interest futures.

Furthermore, interest futures fell as Treasury yields rose due to hawkish Fed remarks. John Williams said he does not see any need to cut interest rates as the economy remains strong. His comments follow Fed Chair Powell’s comments, who said the economy still needs restrictive policy conditions.

Such statements have contributed to a significant decline in rate-cut expectations. Markets now believe the Fed might cut rates only twice this year. Some analysts even think the central bank might not cut interest rates in 2024. Meanwhile, a Reuters poll of economists revealed that the Fed might implement the first rate cut in September. There is no longer hope for a June cut, given the continued resilience of the economy.

US jobless claims (Source: Labor Department)

US jobless claims (Source: Labor Department)

Notably, the data revealed that unemployment claims held steady at a low level last week. This indicates labor market resilience that has kept the Fed on its toes. As long as demand in the economy remains high, it will keep driving inflation. Meanwhile, Treasury yields will keep rising as long as data shows inflation has stalled. Therefore, upbeat US data will likely remain bearish for interest futures.