Treasury yields rise for the fourth consecutive day as oil prices increase inflation risk

U.S. Treasury Yields rose for the fourth consecutive day on Thursday, as the war in Iran intensified. This fueled concerns about inflation and dampened expectations of Federal Reserve rate cuts. U.S. 'crude' jumped 8.91%, to $81.29 a barrel, and Brent climbed 5.17%, to $85.61 a barrel. This was due to the fact that more oil tankers were attacked in Gulf waters, and the U.S. - Iran war intensified. Iranian drones have entered Azerbaijan and are threatening to spread this crisis to other oil producers.

Since the start of the war last week, crude prices have risen by more than 18%.

The yield of the benchmark 10-year Treasury bill in the United States rose by 5 basis points, to 4.132%. It had previously reached a high of 4.15%. Over the last four days, the yield has risen by more than 17 basis point. This is its largest four-session increase since early July.

Michael Green, chief strategist at Simplify Asset Management of Philadelphia, said: "The spike in gasoline prices in response to the Middle East events are clearly a cause for concern for those who expect a Fed reaction function."

The curve is primarily driven by the fear of inflation, which has people reducing their expectations for Fed cutbacks.

According to LSEG, the markets are pricing in a Fed cut of 40 basis points this year. This is down from 50 basis points just before the war started.

The 30-year bond yield increased 2.6 basis points, to 4.743%. It had previously reached 4.772%. This was its highest level since February 12. CME's FedWatch Tool shows that the expectation of a Fed meeting in June to cut at least 25 basis point has dropped from 47.4% last week and 75% one month ago.

The U.S. Treasury yield graph, which is closely watched as an indicator of expectations for the economy, showed a positive part measuring the difference between the yields of two-year and 10-year Treasury bills. This was 54.4 basis points.

The Fed is less likely to need to lower interest rates if recent economic data shows that price pressures are still present and the labor market is stable. Initial jobless claims for the week ending February 28 were flat at 213,000 seasonally adjusted, which was slightly lower than the 215,000 estimates of economists polled. The Labor Department also reported that import prices increased 0.2% in January, which was in line with expectations after a 0.2% increase in December. This followed an upwardly-revised 0.2% rise in December. A decline in energy prices was more than offset a surge of capital goods prices. The Labor Department also reported that worker productivity fell to a 2.8% annualized rate in the fourth-quarter from a 5.2% rate in the third-quarter, which was?upwardly reviewed. Unit labor costs rose at a 2.8% rate after a 1.8% decline.

The data comes just before Friday's "key government payrolls" report which will also influence expectations about the direction of Fed policy.

The yield on the two-year U.S. Treasury, which moves typically in line with expectations of interest rates from the Fed, increased 4.4 basis points, to 3.587%. Over the last four sessions, the two-year yield has jumped nearly 22 basis points. This is its biggest four-day increase since mid-May. Fed officials recently stated that it would take time to evaluate the impact of Iran conflict on monetary policies. On Wednesday, Governor Stephen Miran told Bloomberg TV that the war did not change the need for interest rate cuts. Richmond Fed President Tom Barkin said that high inflation and recent job numbers could shift the Fed's risk outlook.

After closing at 2.5%, the breakeven rate for five-year U.S. Treasury inflation-protected securities (TIPS) reached its highest level since January 30.

The 10-year TIPS Breakeven Rate was at 2,303% last, which means the market expects inflation to average 2.3% per year over the next decade.

(source: Reuters)