Yields on U.S. Treasuries rose across the curve on Monday as traders returned from a holiday weekend, reacting to President Donald Trump's renewed threats of military action against Iran over Hezbollah's attacks on Israel. The move came amid rising oil prices, which heightened concerns about inflation and complicated the Federal Reserve's efforts to tame price pressures.
Oil Prices Surge on Geopolitical Tensions
Brent crude climbed as much as 2.2% to US$82.30 a barrel after Trump's threats, before paring gains following Iran's statement that peace talks had made progress. The increase in energy costs fueled fears that elevated inflation could persist, prompting investors to reassess their bond portfolios.
“The physical U.S. bond market is playing a bit of catch-up this morning, having been out for a holiday on Friday,” said Andrew Ticehurst, strategist at Nomura Holdings Inc. in Sydney. “This, plus the higher oil price this morning are likely weighing on bonds, pushing up yields.”
Trump's Social Media Warning
As U.S. and Iranian officials began talks in Switzerland aimed at securing a more enduring peace deal, Trump posted on social media that he would strike Iran again if it does not “immediately stop their highly paid PROXIES in Lebanon from causing trouble.” He also warned that the U.S. might start collecting tolls if negotiations fail.
Yields Rise Across the Curve
Yields on 10-year Treasuries were three basis points higher at 4.49% after rising as much as five basis points. Two-year debt, among the most sensitive to policy changes, climbed to around 4.22%. The moves reflected both geopolitical risks and hawkish signals from the Federal Reserve.
“Markets are still trading in the wake of the hawkish Fed last week,” said Abbas Keshvani, director of Asia macro strategy at RBC Capital Markets in Singapore. “Recent hostilities in the Middle East and the move higher in oil prices have also nudged yields higher.”
Fed Hawkishness Adds Pressure
Strategists pointed to Fed Chairman Kevin Warsh's hawkish messaging last week as another reason for the selling pressure. Warsh made clear the central bank won't tolerate high inflation. Traders are now pricing in a quarter-point Fed hike by September, compared with expectations for next March at the start of last week.
“The 60 days of U.S.-Iran negotiations now set to start also create the potential for a revival in tensions that would threaten to send crude prices higher and take yields along for the ride,” said Garfield Reynolds, Markets Live Strategist at Bloomberg.
