Treasuries Fall as Trump’s Iran Threats Add to Inflation Concern

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(Bloomberg) — Treasuries dropped after President Donald Trump’s threatening tone toward Iran in a prime-time address pushed up oil prices and added to concern over inflation.

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US two-year yields climbed as much as six basis points to 3.86%, while those on the 10-year rose as high as 4.38%. The dollar strengthened against all its Group-of-10 peers.

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Hopes for a quick end to the Middle East conflict were dashed after Trump said the US plans to launch fresh attacks on Iran within the next two to three weeks, despite claims the war is “very close” to completion. Oil climbed, reviving jitters that the energy-price shock will make the Federal Reserve hesitant to cut interest rates this year. 

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“Trump’s speech left some risks that the war will drag on,” said Naokazu Koshimizu, a senior rates strategist at Nomura Securities Co. in Tokyo. “Rate-hike positions will likely build.”

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Before the conflict broke out in late February, overnight index swaps had priced in more than two Fed cuts this year. Those expectations have been erased after the oil-price surge, with the market now expecting rates to stay on hold.

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US economic data on Wednesday indicated the Iran war is putting upward pressure on inflation. The Institute for Supply Management’s gauge of prices paid for manufacturing inputs climbed to 78.3 in March, remaining at the highest since mid-2022. 

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Concerns that inflation pressures will intensify drove the biggest monthly increase in 10-year Treasury yields in March since late 2024. While higher oil prices risk stoking inflation, they also threaten to weigh on global growth, complicating the outlook for monetary policy.

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Money managers at Pacific Investment Management Co. and JPMorgan Asset Management are amongst those preparing for an economic slowdown that will cause a bond-market rebound.

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“The arm wrestle between inflation expectations and growth concerns will continue,“ said Martin Whetton, head of financial markets strategy at Westpac Banking Corp.

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Federal Reserve Chair Jerome Powell said earlier this week that longer-term inflation expectations appear to be in check, though officials are closely monitoring developments as they assess the economic impact of the war.

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Global bond markets followed Treasuries lower. Australian and New Zealand 10-year yields rose more than 10 basis points, while rates in Europe also climbed. Traders upped bets on European Central Bank interest-rate hikes to price three quarter-point increases this year.

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“Even if there’s a ceasefire, it’s likely to be a fragile ceasefire,” said Andrew Chorlton, CIO for fixed income at M&G Investments, adding that markets may be underestimating the inflationary consequences of a conflict that’s likely to continue to flare up. “The risk premium should rightly be higher.” 

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—With assistance from Ruth Carson and Matthew Burgess.

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(Adds context, commentary.)

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