Rates Spark: Big rate decisions as oil tests highs in World Economy News 07/05/2026 US curve flattens on front end scare factor Earlier Wednesday, the US 10yr yield had gapped higher, and hit 4.4%. Actually, the whole curve gapped up. The hold-out in the Strait of Hormuz was the catalyst. Some duration selling makes a lot of sense here, where we are in “nowhere land” on a resolution to the war. Extrapolate this, and we could sail back up to the 4.5% area that we hit a few weeks ago. Some of this was echoed in the decision of three Fed members to step away from the underlying easing bias that had dominated policy changes since the wider rate-cutting process began. For these three members, that journey is at an end. The main follow-through from the FOMC outcome is a consolidation at 4.4% for the 10yr, and a further rise in the 2yr to above 3.9% – a flatter curve. More to come, at least for as long as the hold-off in the Strait continues, and the prognosis there is for the status quo to be in an uncomfortable place. Between March and April, the implementation notes that accompany the FOMC statement are operationally unchanged, but the tone shifts from active reserve support to maintenance – suggesting the plumbing has calmed enough for the NY Fed Desk to stand down, even as policy stays on hold. Last week the NY Fed cut T-bill buying from US$40bn to US$25bn per month, pointing in the same direction, and indicative of some comfort over the plumbing of the system. The missing piece here is the ongoing elevation in the effective funds rate. It remains at 3.64%, a mere 1bp below the rate on reserves at 3.65% (unchanged). It used to be 7bp below (September 2025). The Fed, ideally, would prefer to get it back there. But no big stress here. In all probability, the effective funds rate will be coaxed down as bank reserves slowly rebuild in line with ongoing T-bills buying, even if at a slower pace. No early ECB hike anticipated as stagflationary pressures complicate the outloo