US Treasury bonds declined, with signs of stalled peace talks between the United States and Iran intensifying concerns that rising energy costs will spur inflation and compel the Federal Reserve to raise interest rates.
The sell-off on Monday pushed yields higher across the $31 trillion US Treasury market. As crude oil prices surged over 7%, the yield on the 10-year Treasury note rose nearly 8 basis points to 4.51%. The yield on the two-year Treasury note, which is most sensitive to Fed policy expectations, increased to 4.08%. Earlier, Iran's semi-official Tasnim news agency reported that Iran would halt information exchanges with the United States in protest of Israel's escalating actions in Lebanon.
Traders increased bets that the Federal Reserve's next policy move will be a rate hike. Interest rate swaps indicate that traders have fully priced in expectations for a rate hike by March 2027, with the probability of a hike as early as October now seen as high as 50%.
In recent weeks, US Treasury bonds had advanced as optimism grew that the US and Iran were nearing an agreement to reopen the Strait of Hormuz. However, the latest reports have cast doubt on this outlook, raising the possibility that oil prices could remain elevated for an extended period.
"Over the past week, the market's assessment was very optimistic that a US-Iran deal was a done deal," said Gennadiy Goldberg, head of US rates strategy at TD Securities. "This has left the market highly sensitive to any negative news, particularly today's reports about Iran halting dialogue with the US."
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