Treasury yields flat as traders reassess Fed rate hike bets

U.S. Treasury yields inched higher on Wednesday as investors mapped escalating tensions across the Middle East and mulled prospects for Federal Reserve monetary policy in the months ahead.

The yield on the 10-year U.S. Treasury note — the key benchmark for U.S. government borrowing — was broadly flat at 4.626%.

The 2-year Treasury note yield, which more closely tracks short-term Federal Reserve interest rate policy, fell one basis point to 4.251%. The longer-dated 30-year Treasury bond yield was flat at 5.132%.

One basis point is equal to 0.01%, and yields and prices move inversely to each other.

U.S. Central Command carried out its 11th consecutive round of strikes against Iran overnight. Early on Wednesday, Secretary of State Marco Rubio told ASEAN Foreign Ministers' meeting in the Philippines that Tehran is "not serious" about peace talks.

"If they're serious, we're serious. If they're not, then we will do what is necessary to protect our interests and also the interests of our allies." he added.

The latest escalation helped extend the rally in oil prices, which jumped as much as 4% in early trading, while investors continue to gauge prospects for more hawkish Federal Reserve policy measures.

"The probability of a July hike was back up to 26% by [Tuesday's] close, the highest since last week's downside surprise in the U.S. CPI print," Deutsche Bank's Jim Reid said in a note on Wednesday morning. "It was at 45% the day before CPI and as low as 10% the day after."

Money markets are now pricing in a 24.1% chance of a rate hike from the Fed this month, and a 69% chance of at least a quarter-point hike in September, according to the CME's FedWatch tool.

Investors will also be monitoring the latest S&P Global Flash U.S. PMI report due Friday, which measures the economic health of American manufacturing and services sectors. 

— CNBC's Chloe Taylor also contributed to this report.