The U.S. Treasury market suffered its sharpest single-day selloff since September 2025 on Monday as the Iran-UAE escalation sent oil prices surging to $114 per barrel and forced investors to reprice the inflation trajectory. The 30-year bond yield cleared 5.0% for the first time since October 2023, settling at 5.04%. The 10-year yield jumped 10 basis points to 4.456% — the highest since July 2025. Rates rose 7-10 basis points across the entire curve.
The damage was concentrated at the long end as inflation breakevens surged: the 10-year TIPS breakeven rose 8 basis points to 2.64% and the 5-year, 5-year forward breakeven — the Fed's preferred long-term inflation-expectations metric — climbed to 2.48% from 2.41%. The 2s10s curve steepened 3 basis points to 51 basis points as the market priced 'higher for longer' rates rather than imminent cuts.
Fed Cut Odds Collapse
CME FedWatch probabilities for a June 18 FOMC rate cut collapsed to 18% from 34% prior to the escalation. September cut odds fell to 44% from 62%. The market now prices only 22 basis points of cumulative easing through year-end 2026, down from 38 basis points last Friday. Fed Governor Christopher Waller said Friday that 'energy-price volatility stemming from the Middle East creates a challenging environment for monetary policy communications.'
Mortgage Market Impact
Average 30-year mortgage rates jumped back above 6.52% — their highest level in over a month �� as the MBS-Treasury spread widened. The Mortgage Bankers Association weekly applications data (released Wednesday) is expected to show a further decline in purchase applications from already-depressed levels. The iShares MBS ETF (MBB) declined 0.8%, while the homebuilder ETF (ITB) fell 2.4% on the dual headwinds of higher rates and oil-driven consumer cost pressure.
Duration Positioning
CFTC weekly data (through April 29) showed leveraged funds increased net-short 10-year Treasury futures positions by 42,000 contracts to -218,000 — the most bearish positioning since March 2025. The iShares 20+ Year Treasury ETF (