US Treasury yields fell across the curve on Wednesday after the Strait of Hormuz reopened, easing concerns about inflation via lower oil prices. The US Dollar Index (DXY) rose by more than 0.22% to 101.62, while West Texas Intermediate (WTI) dropped 4% to about $70.00 a barrel.
The 10-year Treasury yield was down nearly 10 basis points, falling 2% to 4.40%. Inflation expectations also cooled: the 5- and 10-year breakeven rates stood at 2.24% and 2.21%, respectively, after peaking in mid-April at 2.72% and 2.5%. Yields had surged last week as supply disruption risks and a hawkish Federal Reserve tilt pushed expectations towards higher rates later this year. For the July 29 meeting, markets price a 60% probability of no change in policy, alongside a 40% chance of a Fed funds rate increase. Attention now turns to the Core PCE Price Index, Q1 2026 GDP, Durable Goods Orders, and jobless claims.
Market Reactions to Strait of Hormuz Reopening
With the Strait of Hormuz reopening, we are seeing a significant drop in oil prices, with WTI crude falling to around $70 a barrel. This has immediately cooled off inflation fears, pushing the 10-year Treasury yield down toward 4.40%. This is a clear signal that the market’s anxiety about a summer inflation spike is fading fast.
This shift has changed our view on the Federal Reserve’s next move. The probability of the Fed holding rates steady at its July 29 meeting has now firmed up to around 70%, according to the latest data from the CME FedWatch tool. We believe the recent Core PCE reading, which came in at a milder 2.6% year-over-year, gives policymakers more than enough reason to wait and see.
Implications For Traders and Investment Strategies
For options traders, this environment points toward lower market volatility. The VIX index has already dipped below 15, reflecting reduced fear in the market. We should consider strategies that benefit from this calm, such as selling premium through covered calls or cash-secured puts on stable, large-cap stocks.
In the interest rate markets, we are adjusting our positions to reflect a less aggressive Fed. We see an opportunity in Treasury note futures, anticipating that yields may drift lower in the coming weeks. Historically, positive supply shocks like this give the central bank room to be patient, which should keep a lid on rates.
Despite falling yields, the US Dollar Index is surprisingly strong, rising above 101.60. This is likely due to growing weakness in other major currencies, as both the European Central Bank and the Bank of Japan have recently signaled a more dovish stance. We should therefore be cautious about betting against the dollar and could look at options on pairs like the EUR/USD to play this divergence.
Looking at crude oil derivatives, the immediate pressure is clearly downward. The resolution of the Hormuz situation has removed a major supply risk premium from the market. We anticipate WTI will struggle to reclaim higher levels in the near term, making short-term bearish or neutral strategies like bear call spreads a viable approach.
