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(Bloomberg) — Treasuries fell after President Donald Trump again threatened military action against Iran over Hezbollah’s attacks on Israel, sending oil prices higher and prompting investors to reassess inflation risks.
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Yields rose across the curve as traders returned from Friday’s cash-market holiday. The move came as oil prices rose on fears that escalating tensions in the Middle East could keep energy costs elevated and complicate the Federal Reserve’s efforts to tame inflation.
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US 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 US might start collecting tolls if negotiations fail.
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“The physical US 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.”
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Oil rose after Trump’s threats, with Brent crude climbing as much as 2.2% at the open to $82.30 a barrel, while West Texas Intermediate was near $77.
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What Bloomberg Strategists Say…
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“The 60 days of US-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.”
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— Garfield Reynolds, Markets Live Strategist
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Yields on 10-year Treasuries rose as much as five basis points to 4.50% in Asia on Monday, while those on the two-year debt, among the most sensitive to policy changes, climbed to 4.22%.
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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.
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“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.”
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