Treasuries Resume Decline as US Strikes on Iran Drive Oil Higher

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(Bloomberg) — Benchmark Treasuries retreated for the first session in six as renewed clashes in the Persian Gulf spurred gains in oil prices and fueled concern over faster inflation.

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US 10-year yields advanced five basis points to 4.53% in Asia trading Thursday, after dropping almost 20 basis points in the previous five sessions. Their two-year equivalents rose four basis points to 4.07%. The Bloomberg Dollar Spot Index climbed 0.3% in a third straight day of gains.

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Brent crude futures jumped as much as 4.2% to rise above $98 a barrel. That’s after US forces carried out airstrikes on an Iranian military site and struck other targets near the Strait of Hormuz. Iran targeted “the American airbase from which the attack originated,” Press TV reported in a X post, citing the Islamic Revolutionary Guard Corps. Separately, Kuwaiti Air Defenses said they were responding to missile and drone threats.

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The report of Iran’s attack on a US military site has been the most likely driver, said Ken Crompton, head of rates strategy at National Australia Bank Ltd.

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“That’s dented equities appetite a little, and is flowing through to higher oil and bond yields too,” he said. “We’re still generally bearish on longer-end Treasuries: fiscal pressures in many markets, a growing risk that inflation expectations do become gradually less anchored after five years of above-target inflation, and an FOMC that’s becoming increasingly open to rate hikes.”

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Federal Reserve Vice Chair Philip Jefferson warned that inflationary risks remain tilted to the upside, adding that he’s watching for signs that higher energy costs stemming from the Iran war are dragging on consumer spending. Overnight-indexed swaps signal a more than 70% chance of an interest-rate hike by the end of 2026.

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The US also imposed new sanctions to prevent Tehran from profiting from vessels transiting the Strait of Hormuz, underscoring the precarious nature of recent diplomatic progress between the two sides.

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Treasuries had rallied in recent days on optimism a deal would be reached to end the conflict.

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Concern over higher oil prices also pressured government bonds in Asian markets on Thursday. Australia’s 10-year yield climbed six basis points, while the comparable New Zealand yield was up two basis points. Japan’s benchmark 10-year yield edged up by half a basis point.

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