Before we proceed, here’s a look at the Federal Reserve’s (Fed) monetary policy in recent years. The Fed began raising rates in March 2022 as the core Personal Consumption Expenditures (PCE) price index and the Consumer Price Index (CPI) approached 5.6% and 6.5%, respectively. By the time the Fed ended the policy tightening in July 2024, it raised rates 11 times by 525 basis points. The Fed then paused until September 2024 before starting to cut rates.¹ In October 2023, Treasury yields peaked and reached a bottom in September 2024 as the market may have anticipated a Fed rate cut. Investors began selling Treasuries, causing rates to rise just as the Fed began a series of rate cuts in 2024 (Fig. 1). This is an example of when the Treasury market may move independently of Fed policies.

After the Fed began cutting rates in 2024, the yield curve increased at the end of 2024. However, in 2025 various tenors of the yield curve acted more independently of each other. For example, the 2-year note plateaued and started to decline from February of 2025 to Feb 27, 2026 (Fig. 2). The 2-year tends to be more sensitive to Fed moves than the 10-year and 30-year.

The 10-year note yield peaked in Jan of 2025 and went through stages of declines and plateaus when it bottomed on Feb 27, 2026. The 30-year bond remained elevated since the end of 2024, even with three Fed rate cuts in 2025. In February 2026, the 30-year yield began to decline with the rest of the yield curve and bottomed on Feb 27.

The reasoning for the 30-year bond yield remaining elevated since the end of 2024 may include: 

1. The economy has experienced four supply shocks since 2020 that had at least some temporary upward impact on inflation; COVID-19² (supply and demand shocks), the Ukraine war³, tariffs,⁴ and the Iran war.
2. The market’s concern over inflation as the rate had remained above 2% since March 2021. At the beginning of the Iran war, prices rose for crude oil and its byproducts, fertilizer, aluminum grains and shipping. This caused the headline CPI to increase from 2.4% in February to 4.2% in May. 
3. The federal budget deficit at 5.7% of GDP.⁵ The last budget surplus was 2001. (Fig. 3). 
4. The federal debt has steadily grown as a percentage of GDP since Q3 1981 at 30.6% to about 122% as of Q1 2026.⁶

Since the Iran war began, the yield curve has moved higher. The 2-year, 10-year and 30-year Treasuries gained about 54 basis points (bps), 49 bps, and 36 bps, respectively, within the first month of the war.

The options on Treasury futures suggests market sentiment as expressed by the CVOL volatility index and its derived metrics. CVOL, a 30-day annualized volatility index, shows the increased Treasury volatility around Liberation Day (April 2, 2025), when tariffs were announced. Investors initially purchased Treasuries as a safe-haven investment before selling off as the market view turned towards potential inflation. 

For the remainder of 2025, Treasury yields experienced a declining volatility (CVOL) as the yield curve mostly drifted sideways. Volatility increased when the yields began to breakout to the downside in early 2026. Soon after, the Iran war occurred, causing volatility to continue increasing as yields reversed and quickly moved higher. Regardless of the yields moving higher or lower, their trading ranges expanded, causing volatility to increase. After the initial shock of the war, yield volatility declined and moved sideways as the yield curve remained in a wide trading range (Fig. 4).

One of CVOL’s derived metrics, the skew ratio may imply sentiment of market direction. After Liberation Day on April 2, 2025, the skew ratio primarily drifted sideways. (Above 1.0 suggests bullish sentiment. Below 1.0 suggests bearish sentiment). Cycling above and below 1.0, may suggest market sentiment does not have a directional view. When the war started, the skew ratio offered upward yield direction and has since slowly declined, suggesting the options market is less certain of the Treasury yield direction (Fig. 5).

CVOL’s convexity metric when elevated often suggests sentiment of increased market uncertainty as it moves higher due to more variance at the wings of the strike prices relative to at-the-money strike prices (Fig. 6).

There tends to be more variance in the 2-year convexity relative to the 10- and 30-year Treasuries, as it can be more sensitive to short-term market news. The 2-year convexity was declining due to yields breaking to the downside in early 2026 with less variance in the wings of the strike prices relative to at-the-money strike prices. 

The convexity increased as the war started and simultaneously the skew ratio also increased. These two metrics have a complex interplay, normally the skew ratio is indicating direction and convexity is indicating uncertainty. When the skew ratio and convexity move together may suggest market sentiment’s view of direction is short lived due to increased uncertainty.

As Iran and the U.S. negotiate a permanent end to the war, the two parties seem to have much ground to cover before arriving at an agreement. What happens if there is no agreement when the 60-day memorandum of understanding ends, or if they do have an agreement?

There are still mines in the Strait of Hormuz. It’s uncertain how insurance companies and vessel owners will perceive the ceasefire. It’s a relief to markets as ships are slowly getting out of the Persian Gulf, but will there be a permanent peace that will untangle supply chains and offer confidence of ships to return to the Persian Gulf, or is this short-term market relief?

The era of Fed Chair Kevin Warsh began with his first FOMC meeting in mid-June. Warsh’s remarks at the ensuing press conference came across to some as having a hawkish tone as he stated, “inflation is a choice” and that the Fed wanted to get inflation back to the 2% target. The market is currently factoring in the possibility of a rate increase this fall, However, the Fed may not have to raise rates, as the market is already doing a lot of the work for the central bank. Is the Fed’s perceived hawkish tone enough to send a signal to the markets without actually increasing rates?

If consumer prices remain elevated, but stay range bound, the inflation rate could start to plateau and eventually see a reduction. This could be a reason for the Fed not to hike, but to hold rates steady in the foreseeable future. However, the White House is planning to add more tariffs. Could this add to inflation?

At the start of the Iran war, front-month WTI crude oil futures quickly rallied from about $65 to around $110 per barrel, and is currently around $70 (about a 35% drawdown) as the ceasefire is offering at least short-term relief to the oil market.

The S&P 500 index peaked on January 28, 2026, (before the war started) and declined by about 10% by March 30. It then rallied especially after the initial April ceasefire was announced, suggesting some equity market relief, and reached new highs. It’s now in a trading range.

Currently, there are several geopolitical and market uncertainties giving reasons for yields to increase or at least stay at current levels. Except for the 2-year yields recently heading higher, U.S. Treasury yields have remained primarily rangebound and are not inferring market relief during the ceasefire.

The Treasury options on futures market sentiment via CVOL metrics data suggests a market uncertainty narrative as the skew ratio is declining and sitting around 1.0 and an elevated convexity especially in the 2-year note -- meaning market participants may be trading both directions of the yield curve.

1. Federal Funds Rate History 1990 to 2026
2. Inflation since the Pandemic: Lessons and Challenges
3. Turmoil in Commodity Markets Following Russia’s Invasion of Ukraine
4. Tracking the Economic Effects of Tariffs
5. Federal Surplus or Deficit [-] as Percent of Gross Domestic Product (FYFSGDA188S)
6. Federal Debt: Total Public Debt as Percent of Gross Domestic Product (GFDEGDQ188S