Treasuries fell after President Donald Trump again threatened military action against Iran over Hezbollah's attacks on Israel, prompting investors to reassess inflation risks. Yields rose across the curve as traders returned from Friday's cash-market holiday. The move came after oil prices rose early on Monday on fears that escalating tensions in the Middle East could keep energy costs elevated and complicate the Federal Reserve's efforts to tame inflation.
Oil prices climb on geopolitical tensions
Brent crude climbed as much as 2.2 per cent to US$82.30 a barrel after Trump's threats before reversing the move after Iran said there had been progress in the peace talks. United States and Iranian officials began talks in Switzerland aimed at securing a more enduring peace deal. As the meetings got underway, Trump said in a social media post that he would strike Iran again if it doesn't "immediately stop their highly paid PROXIES in Lebanon from causing trouble." He also warned Iran that the U.S. might start collecting tolls if negotiations fail.
Market reaction and Fed expectations
Yields on 10-year Treasuries were three basis points higher at 4.49 per cent after rising as much as five basis points, while those on the two-year debt, among the most sensitive to policy changes, climbed to around 4.22 per cent. Strategists also 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 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."
Analyst insights on inflation risks
What Bloomberg Strategists Say: "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. "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."
