2-year Treasury yield falls as Kashkari backs a Fed rate increase by year-end

The 2-year Treasury note yield moved lower on Friday as Minneapolis Federal Reserve President Neel Kashkari said he has changed his outlook and now expects that one interest rate increase will be necessary this year.

Kashkari is a voting member of the Federal Reserve’s policy-setting Federal Open Market Committee (FOMC).

Fixed income prices were also helped as energy prices declined, lessening the expected future impact from higher oil and gasoline prices.

The 2-year Treasury note yield, which closely tracks short-term Fed interest rate decisions, fell more than 3 basis points to 4.086%, while the yield on the 10-year Treasury — the benchmark for mortgages, auto loans and credit card debt — fell 2 basis points to 4.372%. The 30-year Treasury yield, which traditionally moves on geopolitical events, was up less than 1 basis point at 4.865%.

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

In remarks one week after the FOMC voted to hold its benchmark rate steady, Kashkari said he sees a likely hike this year as the economy continues to feel the hit from spiking inflation tied to fighting in the Middle East and other factors.

“In March, I had penciled in one rate cut by the end of the year. In June, I’ve changed that to one rate hike by the end of the year,” the policymaker said during a panel discussion at the Aspen Ideas Festival. “It’s a pencil, and so we’re going to have to see how the data comes in.”

Treasury yields ended Thursday little changed, after the core personal consumption expenditures index, the Fed’s favorite measure of inflation, which excludes food and energy prices, hit 3.4% in May, its highest since October 2023, and up 0.3% from April. The all-items PCE surged to a seasonally-adjusted 4.1% annual rate, its highest level since the spring of 2023.

The shift higher in the Fed’s preferred inflation gauge comes amid an increasingly hawkish tone on inflation from the central bank’s new chairman, Kevin Warsh.

Oil prices were lower early Friday even as investors monitored renewed tensions in the Middle East.

U.S. West Texas Intermediate futures fell 3.74%% to close at $69.23 per barrel, while Brent crude, the international price benchmark, traded down 4.34% to close at $71.99.

A U.S. official said Iran was responsible for an attack on a cargo ship sailing under a Singapore flag near the Strait of Hormuz, and Iraq said it was considering withdrawing from OPEC amid a dispute over oil output quotas.