U.S. Treasury yields fell slightly on Monday but remained close to recent multiyear highs, while the 10-year German Bund yield hit another 15-year high as an interest-rate hike by the U.S. Federal Reserve this week looked increasingly possible.

Friday's strong U.S. consumer-price inflation data bolstered expectations for a rate increase at Wednesday's Fed policy announcement, particularly given recent U.S. jobs data that were well above expectations.

At the same time, a continued rise in oil prices intensified concerns about inflation as Middle East tensions escalated further.

"After Friday's CPI, we think that it is likely that the Fed will deliver a rate hike this week," said Mohit Kumar, global economist at Jefferies, in a note.

The 10-year Treasury yield slipped 0.4 basis points to 4.970%, edging back after hitting a near three-year high of 4.992% on Friday. This leaves the yield hovering just below the psychologically key 5% level.

The 10-year German Bund yield rose 2 basis points to 3.535%, its highest since 2011, Tradeweb data showed.

U.S. money markets priced an 87% probability that the Fed will hike rates by 25 basis points on Wednesday. This also helped lift the DXY dollar index, which measures the dollar's value against a basket of currencies, to an 11-day high of 99.590, while the euro fell to a one-month low of $1.1533, LSEG data showed.

"The repricing [in U.S. interest-rate expectations] has kept Treasury yields elevated and provided support to the greenback," Wael Makarem, financial markets strategists lead at Exness, noted. "Beyond this week, markets are pricing in further tightening this year and the next," he said.

Across the Atlantic, elevated oil prices continue to pose an inflationary threat for Europe, with Brent crude last up 3.5% at $108.28 a barrel.

The European Central Bank raised interest rates last week, bringing the deposit rate to 2.50%--a level widely viewed as the upper bound of neutral policy. The central bank also revised up its inflation forecasts for 2027 and 2028, alongside higher GDP projections for 2026 and 2027.

However, analysts said the slight fall in Treasury yields on Monday suggested that market expectations for future Fed rate increases could be overly aggressive. Money markets currently price in more than 90 basis points of U.S. rate hikes over the next 12 months, according to LSEG data.

Jefferies expects that the Fed will ultimately deliver fewer rate increases than the market currently anticipates.

"The first hike may be required from a credibility perspective. But subsequent hikes will depend on how long the war lasts and the oil prices," Jefferies' Kumar said.

A U.S. rate increase this week is also not necessarily a done deal. The futures market's response to Friday's U.S. CPI data--which saw September rate-hike odds jump to 87% from roughly 60% prior to the release--"has been far too hawkish," said Simon Ballard, chief economist at First Abu Dhabi Bank, in a note.

"Moreover, we would continue to argue that monetary policy is a relatively blunt tool for combating geopolitically fuelled inflation," he said. "We believe the Fed should keep its powder dry this week and allow the macro data backdrop to evolve before risking a more restrictive monetary policy stance."

Investors will pay close attention to the vote split among Fed policymakers on Wednesday and the press conference, as well as the rate decision itself.

"Signals that more increases remain likely could drive yields higher and extend the dollar's advance, while any indication that this week's move is an isolated adjustment could encourage traders to scale back tightening expectations and weigh on the currency," Exness's Makarem said.