US 30-year Treasury yield hits 5.17%, highest since 2007; Fed hike odds cross 50%

The US 30-year Treasury yield climbed to 5.17%—briefly touching 5.20% overnight—its highest reading since 2007. The 10-year yield followed, reaching a 16-month high of 4.687% before settling at 4.65%. The primary catalyst: persistent inflation fears tied to the Iran-Israel war and the risk of Strait of Hormuz disruptions, which have kept energy prices elevated despite Tuesday's brief pullback.

Fed rate expectations have inverted dramatically. Before the Iran conflict escalated, markets were pricing in two rate cuts in 2026. As of May 20, the CME FedWatch tool shows a greater-than-50% probability of at least one rate hike by December—a complete reversal. With Brent crude near $109/barrel and WTI at $102, any upside surprise in the CPI or PCE would reinforce the tightening scenario. Gold retreated to a six-week low of $4,496/oz, undermining its safe-haven premium as real yields rise.

In currency markets, the dollar index reached a six-week high of 99.47. Most watched is USD/JPY at 159.02 yen—within reach of the 160-yen threshold that triggered direct Bank of Japan (BOJ) intervention in 2024. JPMorgan and MUFG analysts have both identified 160 as the key intervention line. EUR/USD touched a six-week low of $1.158 before recovering to near flat.

President Trump's assertion that he would end the Iran war "very quickly" did pull WTI crude down roughly 2%, and equity futures found footing—S&P 500 futures +0.3%, European shares +0.4%. But the bond market selloff reflects a structural concern: a prolonged Hormuz premium will keep energy inflation sticky regardless of ceasefire rhetoric, and the Fed's credibility window is narrowing.

Key events ahead: FOMC minutes (May 21 local time), April PCE inflation print, and Nvidia ($NVDA) Q1 FY2027 earnings, where the options market is pricing in approximately 5.5% implied move. A hawkish minutes release could push the 30-year back toward the 5.20% level for the next test.