US Treasury yields have risen, with the yield on the 10-year note increasing by 5.5 basis points to 4.525%. This comes as market participants process US inflation data and anticipate the Producer Price Index (PPI) and Retail Sales figures.

The two-year US Treasury yield has gained three basis points, standing at 4.049%. US Treasury yields are near the week’s highs due to improved market sentiment following a temporary tariff suspension between the US and China.

Us China Tariff Pause

The US and China have agreed on a 90-day pause in tariffs, reducing duties by over 115%. Despite such developments, the current monetary policy by the Fed addresses economic changes, although future outcomes remain uncertain.

Concerns persist as tariffs could contribute to rising inflation, but the effect’s duration is unclear. The US 10-year real yields have climbed three basis points to 2.21%.

The Federal Reserve continues to hold the authority in monetary policy through interest rate adjustments. It aims to manage inflation and employment, using tools such as interest rates, Quantitative Easing (QE), and Quantitative Tightening (QT).

The Fed’s actions influence the US Dollar’s strength. By controlling borrowing costs, the Fed attempts to maintain economic stability.

Us Treasury Yield Recalibration

With the sharp move in US Treasury yields—especially the 10-year now sitting north of 4.5%—there’s a clear recalibration of interest rate expectations underway. That 5.5 basis point rise on the 10-year points to a market that’s leaning more towards the idea that inflation might not cool as quickly as previously expected. The anticipation around PPI and Retail Sales this week could very well harden or reverse that view, depending on how the data unfolds.

Real yields, which strip out the effects of inflation, also inched higher. They’ve hit 2.21%, a level that suggests inflation-adjusted returns are becoming more attractive. This is the kind of move you don’t ignore if you’re using Treasuries as directional hedge references or need clearer signals for long-dated pricing.

The short end of the curve—those two-year yields nudging up to 4.049%—continues to reflect near-term rates expectations. There’s still no obvious cut priced in with conviction, and considering economic data remains resilient, it’s understandable why policymakers might hold current rates for longer, even in the face of external trade tension relief.

Following the latest truce in trade measures—the 90-day tariff pause forming the basis for improved sentiment—the market has responded with positioning that favours risk-on trades. However, such shifts can reverse quickly if tariffs are reintroduced or if the inflation pass-through from prior measures persists longer than anticipated. The impact of tariffs on headline inflation is often delayed, and depending on import channels, there’s no guarantee that easing duties will unwind the pressure where it counts.

There’s a strong likelihood that future monetary steps hinge more on incoming data than fixed timelines. Powell’s emphasis has consistently been aimed at controlling inflation while avoiding overtightening. But with yields moving up in lockstep with sentiment changes, there’s a re-pricing happening across rate-sensitive instruments. This has obvious implications on dollar strength, especially as currency traders pivot around real rate differentials.

For our purposes, it’s essential to treat current levels not just as a trend but as potential markers for recalibration. The vertical structure of the Treasury curve, now moderately flatter, implies tighter conditions ahead—or at least an economic environment where front-end expectations are being reined in while longer-term risks are being priced anew. These are setups that tend to produce compression within volatility curves and can shift gamma exposure quite meaningfully in short timeframes.

What we’re seeing now is a reflection of conviction returning to options books, particularly on rates. Adjustments in premium, notably in shorter-dated contracts, indicate that directional plays are being favoured over range-bound views. In that context, performance must be adjusted more dynamically. Traders may find that old models relying on static vol assumptions produce edge-worn outcomes under this refitted regime.

We’re watching how pricing moves around the PPI and retail numbers, as these tend to feed directly into both Fed outlooks and market-based inflation estimates like breakevens. Once those prints land, the curve may either resume its bear steepening or flatten further, depending on whether growth expectations remain solid or not.

Positioning now involves staying tight to new breakpoints on duration and being aware of convexity shifts as rates continue to test new near-term limits. It’s less about directional bias here and more about precision in placement, especially when broader liquidity remains uneven.

Create your live VT Markets account and start trading now.