U.S. Treasury yields inch lower as bond markets price 'significant' inflation risk

Yields on U.S. Treasurys moved lower early on Wednesday, following a sharp sell-off across bond markets as inflation concerns continue to weigh on investor sentiment.

The 10-year Treasury yield — the main benchmark for mortgages, auto loans and credit card debt — was just under 2 basis points lower in early trade at 4.653%. During Tuesday's session, it reached its highest level since January 2025, at 4.687%.

Meanwhile, the longer-dated 30-year Treasury bond yield was around 1 basis point lower at 5.172%, having briefly advanced to 5.197%, its highest level since July 2007, during the previous day's trade.

Yields on the 2-year Treasury note, which are more sensitive to calls on short-term Federal Reserve interest rate moves, slipped by 2 basis points to 4.106%.

One basis point equals 0.01%, or 1/100th of 1%, and yields and prices move inversely to one another.

Traders are weighing prospects for a re-escalation of hostilities in the Middle East conflict, its lasting impact on prices and how developments will shape the monetary policy of the Federal Reserve and other central banks.

Minutes from the April 27-28 Federal Open Market Committee meeting will be published later Wednesday. The Fed kept the federal funds rate unchanged at between 3.5% and 3.75%, but the decision drew the biggest dissension within the FOMC in more than 30 years, with the rate-setting committee split 8-4.

HSBC strategists said in a note Tuesday that U.S. Treasurys have entered a "danger zone", warning that sticky inflation and hawkish rate expectations could start heaping pressure on broader risk assets.

Oil prices edged lower on Wednesday morning, after two Chinese tankers carrying about 4 million barrels of oil exited the Strait of Hormuz. U.S. West Texas Intermediate prices were some 0.3% lower at $103.70% a barrel, as Brent crude, the international benchmark, dipped 0.4% to $110.83 per barrel.

However, President Donald Trump reiterated threats to strike Iran should a diplomatic off-ramp fail to materialize in the coming days. Iran's foreign minister Abbas Araghchi responded in a post on X, saying a "return to war will feature many more surprises."

Economic data releases expected today include the Mortgage Bankers Association's latest average 30-year fixed mortgage rate for the week ending May 15.

Bryn Jones, head of fixed income at Rathbones, said bond markets globally are now pricing a "significant" inflation risk, as global borrowing costs remain elevated.

In Germany, yields on the 10-year bund more than 1 basis point lower, at 3.1689%, with the 30-year bund yield also about 1 basis point lower, at 3.6878%. In the U.K., yields on 10-year Gilts were last seen flat at 5.132%, as 30-year Gilt yields increased 1 basis point to 5.801%.

"If [the conflict] carries on for another few months, clearly yields and inflation pressures are going to build," Jones told CNBC's "Europe Early Edition" on Wednesday. "Clearly, if there's some resolution, yields are going to snap back."