US Treasuries Extend Fall as Iran War Fuels Global Bond Rout

US Treasuries followed other bond markets lower, with traders retreating from bets for interest-rate cuts in response to the potentially inflationary impact of an escalating Iran war.

US Treasuries fell for a second day as surging oil prices prompted traders to curb bets on more than one Federal Reserve interest-rate cut this year. You can save this article by registering for free here. Or sign-in if you have an account. (Bloomberg) — US Treasuries fell for a second day as surging oil prices prompted traders to curb bets on more than one Federal Reserve interest-rate cut this year.

The declines were subsequently pared as investors weighed the potential for rising energy prices to derail economic growth, and amid stabilization in oil and US stocks. The two-year note’s yield, more sensitive than longer maturities to Fed policy shifts, remained less than three basis points higher near 3.50%. Earlier, the two-year yield jumped as much as 12 basis points to 3.59%, approaching its highest level this year.

Traders, who as recently as Friday were fully pricing in two Fed rate cuts this year, trimmed the odds of a second cut to about 80%. By signing up you consent to receive the above newsletter from Postmedia Network Inc. A welcome email is on its way. If you don't see it, please check your junk folder. “The market is thinking about inflation,” Bhanu Baweja, chief strategist at UBS, said. The move in bonds, however, “is overdone.

If the oil problem persists, it’ll become a growth problem. The Fed can sit tight for now, but will turn dovish incrementally afterwards.” In an abrupt reversal of fortune for the Treasury market — where benchmark yields reached their lowest levels in months early Monday in a burst of haven demand after the US and Israel struck Iran over the weekend — the subsequent surge in energy prices has threatened to halt progress toward lower inflation that allowed the Fed to cut interest rates three times last year.

While the central bank paused lowering rates in January and as of last week wasn’t expected to resume until its July meeting, the consensus view has since shifted to September. “The Fed will view it as a shock to the system as energy prices move higher,” said Gregory Faranello, head of US rates at Amerivet Securities. “But they were already on hold. It’s fair to price out further rate cuts.

It was fair even before the recent events.” Speaking Tuesday, Minneapolis Fed President Neel Kashkari said the conflict and its potential inflationary consequences made him less certain of his view that a rate cut was likely this year. Investors are dumping bonds globally on fears that the war will stoke inflation, altering the course of monetary policy. Wagers on a prolonged period of steady interest rates — or in the case of the Fed, further cuts — are being reassessed as the conflict has impeded supply from the region and unleashed a surge in oil and natural gas prices.

The prospect of a prolonged conflict also carries risk of increased US spending at a time when deficit forecasts were already under a cloud following last month’s Supreme Court ruling invalidating tariffs the administration has used in the past year to raise revenue. The US 10-year yield rose as much as eight basis points to 4.10% before retreating to around 4.06%. Comparable UK and most euro-zone yields ended the day five to 10 basis points higher.  While the Treasury selloff is milder because of the potential for US domestic energy production to act as a buffer, the European bond rout “is forcing US Treasury traders to re-examine their view that US yields will be lower this year,” said Tom di Galoma, managing director at Mischler Financial Group.  Treasuries in February had their best month in a year as inflation ebbed and stocks stumbled, creating haven demand.

At the same time, signs of resilience in the job market squelched wagers on a Fed rate cut this month. Meanwhile, the Labor Department’s February employment report is slated to be released Friday. “From a Fed perspective, this gives them more of a reason to hold for longer to see the impact coming from the oil spike if we continue to see a labor market holding up,” said Molly Brooks, US rates strategist at TD Securities.  Before this week, Treasures were benefiting from a flight-to-safety trade fueled in part by concerns over artificial intelligence and bets on more Fed rate cuts.

That evaporated abruptly as Israel and the US launched strikes on Iran on Feb. 28, which has since broadened in the region. Postmedia is committed to maintaining a lively but civil forum for discussion. Please keep comments relevant and respectful. Comments may take up to an hour to appear on the site. You will receive an email if there is a reply to your comment, an update to a thread you follow or if a user you follow comments.

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